'Monetary policy is working'; ANZ drops forecast for negative OCR

ANZ chief economist Sharon Zollner says interest rates will stay low, but does not expect the Reserve Bank to cut the OCR below zero. Photo / Kapiti News

New Zealand's largest bank no longer expects the official cash rate to be cut below zero, saying a booming housing market and a new scheme to lower borrowing rates are making the move unnecessary.

ANZ officially changed its forecast for the OCR today, predicting that while the Reserve Bank would instigate another cut this year, it would lower the benchmark rate only marginally, from 0.25 per cent to 0.1 per cent, a new record low.

While through 2020 most forecasters expected the OCR to be cut below zero for the first time, expectations of cuts dropped sharply in November when Finance Minister Grant Robertson called on the Reserve Bank to work with it to help improve housing affordability.

ANZ chief economist Sharon Zollner said that the experience of recent months showed that, despite drawbacks, the impact of sharply lower interest rates had worked.

"The housing market has boomed, defying widespread predictions of a bust. While exacerbating wealth inequality and worsening housing affordability, this has supported household spending and construction, and thereby employment and inflation."

Commodity prices in New Zealand had held up, vaccine development had given more confidence about a normalisation of trade and New Zealand had seen less of an impact from Covid than feared, Zollner added.

While earlier in the day Zollner said there was a risk that New Zealand may be poised to slip back into a mild recession, with a negative quarter of growth likely for the final three months of 2020 and the possibility of a tourism-linked contraction at the start of 2021, overall the economy had bounced back better than expected.

"The labour market is tighter than previously expected, albeit partly due to a hit to labour supply … unemployment rate is not going to lift as much as previously expected [and more] broadly, this does not feel like an economy with a lot of spare capacity."

ANZ also said that the Reserve Bank's funding for lending programme was starting to have an impact on lending rates.

Earlier this week, Westpac announced it was offering a one-year fixed-rate mortgage of 2.29 per cent, the lowest of any of the four major banks.

Since Robertson made his comments about the Reserve Bank, the trading of financial products linked to future interest rate movements suggested traders no longer expect the OCR to be cut below zero.

ASB has already formally dropped its prediction that the OCR would be cut below zero, although in December economists at Westpac maintained that a cut below zero remains necessary.