Drop in OCR to 2 per cent tipped for 2016

Reserve Bank Governor Graeme Wheeler, is expected to drop the OCR. Photo / Mark Mitchell

Economists are predicting the Official Cash Rate to drop to 2 per cent next year after a cut next month and two further reductions next year.

The current Official Cash Rate (OCR) is 2.75 per cent, and economists from ASB Bank and Westpac are predicting it will fall to 2 per cent next year.

Westpac has been predicting the fall since October, but this week ASB economist Nick Tuffley said the bank has changed its position.

"For some time we have had substantially weaker inflation forecasts than the RBNZ. The downside risks to inflation have been growing consistently. We have been warning of the growing risk that the RBNZ will have to cut further in 2016," Tuffley said in a statement.

The Reserve Bank will announce whether the OCR will drop when it delivers its quarterly Monetary Policy Statement (MPS) on December 10.

Tuffley said the Reserve Bank's dilemma was not unique, and central banks all over the world have been forced to cut rates because of low inflation.

"In our opinion, a rate cut in the December MPS is now a done deal."

Tuffley also warned of a rise in unemployment in 2016, which would likely suppress wage growth and put further downward pressure on inflation.

The further cuts in 2016 were likely to come in June and August, Tuffley said.

"The RBNZ will want to watch and wait, to assess the impact of this year's rate cuts. We have a strong view that the RBNZ will likely be disappointed with what they see."

Associate Professor in economics and finance David Tripe, of Massey University, told Newstalk ZB this morning SBS Bank releasing the lowest mortgage rate in the country at 3.99 per cent supported the prediction of a 2 per cent OCR in 2016.

"Certainly it could be as low as 2 per cent some time next year, that's not unrealistic, but it isn't necessarily what I would forecast," he said.