The Reserve Bank has been loosening monetary conditions since June 2014. Photo / File
The Reserve Bank has been loosening monetary conditions since June 2014. Photo / File
Economists expect this Wednesday's monetary policy statement from the Reserve Bank to deliver a quarter-point cut in the official cash rate to a record low of 1.25 per cent.
Market expectations are for a follow-up cut in November, which would take the rate to just 1 per cent.
The ReserveBank has been loosening monetary conditions since June 2014, when it cut the official cash rate (OCR) to 3.25 per cent.
If a 1 per cent official cash rate fails to stimulate some inflation, the bank will need ponder more unconventional methods, economists said.
Annual inflation came to 1.7 per cent in the June quarter - below the Reserve Bank's 2 per cent mid point of its 1 to 3 per cent target range - and it is expected to trend lower as the economy slows.
The Reserve Bank, in response to an Official Information Act request from Bloomberg, said last week that it was at a "very early stage" in refreshing its "unconventional monetary policy strategy".
While unconventional measures - which could include the central bank issuing term lending to the commercial banks at very low interest rates - are not on the radar screen just yet, they remain a possibility.
"It is still relatively theoretical but it is not as theoretical as it was last year," ASB chief economist Nick Tuffley said.
Tuffley said ASB had been looking at how low the OCR could go before it stopped making a difference.
As the OCR nears zero, the issue would be how long before bank depositors decided to go elsewhere for a better return, he said.
"That's the point were the OCR becomes less effective and at that point you need to start looking at unconventional measures," he said.
Local term deposits in New Zealand are at 3 per cent while Australian rates are at slightly under 2 per cent.
"The Australian experience suggests that we could still see deposit rates fall further without there necessarily being a drop-off in deposits with the banks.
"The issue would be if the OCR loses traction on deposit rates, that's when they would want to start looking at other alternatives," he said.
ANZ expects to see an economic slowdown, led by construction. Photo / File
Based on current New Zealand conditions, there was a clear case for cutting to 1 per cent by November.
Economists are placing a lot of weight on the latest ANZ Business Outlook, which revealed a slump in business confidence.
The more important indicator of real economic performance - firms' views of their own activity - fell to the lowest mark since August last year.
"The struts under New Zealand's economic expansion are being kicked out, one by one," ANZ chief economist Sharon Zollner said in a commentary.
She said the economy will find a floor shortly before starting a gradual recovery, partly because of the extra monetary stimulus from the Reserve Bank.
"However, evidence for this bottoming remains highly tentative, and measures of business sentiment and intentions suggest significant downside risk," Zollner said.
"The tight labour market that has been supporting household spending was coming under threat," she said.
"Employment intentions in our most recent ANZ Business Outlook survey falling from zero to a net 6 per cent of firms expecting to cut jobs, and plummeting for the construction sector (down 33 per cent), which matters because this sector is supposedly going to be a key growth driver over the year ahead," Zollner said.
"And broader economy-wide growth signals continue to weaken, with several at their lowest levels in a decade," Zollner said.
The BNZ, who last week joined the club by predicting two cuts this year from one previously, said ANZ's survey was the straw the broke the camel's back.
"It joins a long list of leading indicators that suggest growth in New Zealand is likely to slump to levels well below that which the Reserve Bank is expecting," it said.
