Westpac changes tack on NZ interest rates, sees OCR on hold

Westpac chief economist Dominick Stephens. Photo / NZ Herald.

Westpac has done an about face in predicting the Reserve Bank will keep its official cash rate on hold at the release of its monetary policy statement on November 13.

The bank previously forecast a 25-basis-point cut, although it has said it would be close call.

Westpac now expects the cut - to 0.75 per cent - to occur next February.

"The Reserve Bank's forecasts and rhetoric had been 50/50 on whether a cut might be required at some stage, but we thought a rash of downside surprises would prompt the Reserve Bank to cut as soon as November," Westpac chief economist Dominick Stephens said in a commentary.

"That is not the way the dice have fallen. True, economic growth remains subdued and business confidence is very low. But on balance the outlook for inflation and employment has actually lifted a little since August, because the exchange rate is well down, inflation has surprised to the upside, and the housing market is stirring," Stephens said.

In addition, global financial market sentiment had improved and the US and Australian central banks were suggesting that they have cut rates far enough for now.

"Given all of this, we now favour no cut in November. However, we do expect the Reserve Bank will remain open to the possibility of future cuts, depending on how the data evolves – this will be an ongoing pause for information, rather than the end of the easing cycle," he said.

"We still expect the Reserve Bank to cut the official cash rate to 0.75 per cent, but we now expect that will occur in February next year.

"By that stage, we forecast that the current phase of improving global market sentiment will have given way to renewed uncertainty, particularly as the US presidential election race heats up," he said.

Stephens said some second tier data such as electronic card transactions, job ads and car sales had been picking up.

Annual inflation was a stronger-than-expected 1.5 per cent in the September quarter.

Stephens also pointed to a housing market that was picking up, contrary to the Reserve Bank's expectations.

Earlier this morning, the US Federal Reserve cut its official interest rate by 25 basis points for the third time this year, as was widely expected.

The US central bank said uncertainty on the economic outlook justified its latest cut but chairman Jay Powell said that a preliminary US-China trade deal and lower risk of a no-deal Brexit had the potential to increase business confidence.