Will the OCR drop again?

Coins, calculator and ruler sitting on piece of paper with figures on it

Some recent changes in the housing market and the latest CPI release have some people questioning whether or not another cut to the OCR this year is necessary. Some are suggesting that the market is picking up and the economy is starting to feel the effect of the August OCR cut, while some are suggesting that the RBNZ still has cause for concern from the latest CPI report.

OCR to remain the same

The latest data from the REINZ showed that the housing market has increased by 6.6%, which means that the RBNZ should rethink a further OCR cut. At least for the remainder of the year. The Westpac Economics Team expressed that they believe there's a 40% chance that another cut will happen this year, which is a significant increase to what they were predicting last month. With spring setting in, which is generally the busiest season in the property market, we may naturally see an increase in activity without the need for an RBNZ intervention.

The numbers in the recent CPI release were also showing positive signs. Way above the RBNZ's expectation. In quarter 3, CPI increased by 0.7%, which is 0.2% above what the RBNZ penciled in. In a deflating market, which we're currently in, that’s a good sign as it gives consumers some encouragement to begin spending, in the hope they are buying items at its lowest possible price. With the unemployment rate not moving from the last economic update, it's also an encouraging sign of income possibly increasing from a supply and demand point of view. This is then with the hope that consumers will have more from their paychecks to spend.

From this standpoint, some may suggest that the aggressive cut in the OCR back in August is starting to affect the economy, which is an encouraging sign for growth.

OCR cut

Although the latest CPI release showed some encouraging signs of economic growth, there are also signs that may be concerning to the RBNZ.

Firstly, it looks like the tradeables’ inflation has only increased slightly by 0.1%, which brings its annual movement to -0.7%. Arguably, this is beyond our control and is due to the weak global prices driven by the US and China trade war. On the other hand, non-tradeables’ inflation increased by 1.1% in the last quarter, which now makes it 2.7% more than expected by the RBNZ for the year.

This means that there are signs of our domestic economy running out of capacity and further reducing business profitability with the increase in costs. Already, rental cost has increased by 2.9% while home construction cost has increased by 2.8%. Naturally, a squeeze in profitability will decrease business confidence, which then has a roll-on effect on a business’s willingness to expand and grow.

Our thoughts

Although it is a great sign to see the property market picking up and consumers being encouraged to spend, we feel that if business confidence continues to be flat, then it's going to be a very long time before we see some decent growth in the economy.

We are leaning more towards another 0.25% cut in the OCR in November and a very slow growth going into 2020. Historically, it does take around nine months for the border economy to start to see the effects of a dramatic change in the monetary policy such as the 0.5% cut that we had in August. So, it might be early 2020 before we start to see things pick up at a faster rate.