OCR to go below 2.5% and stay down

By Pattrick Smellie

Thursday 2nd April 2009

Westpac Bank economists are predicting the Reserve Bank of New Zealand will be forced to drop the official cash rate (OCR) below the low-point of 2.50% and for longer than implied in its 12 March Monetary Policy Statement.

Westpac was the first bank to call the tightening in monetary conditions approximately a fortnight ago, when the New Zealand dollar strengthened, and longer fixed term interest rates began to rise.

Pointing to the plunge in the latest Westpac McDermott Miller Employment Confidence Index for the first three months of the year, the bank's chief economist, Brendon O'Donovan, said the RBNZ's expectations of very weak consumer spending were being borne out and the recent "de facto tightening in monetary conditions" would not be welcome.

Just before the index was released, RBNZ Governor Alan Bollard expressed such displeasure, saying longer term interest rates were "out of line" with expectations and, combined with the stronger Kiwi dollar, could undermine the conditions for economic recovery.

"We continue to expect that the RBNZ will have to cut the OCR below the 2.5% floor implied by their March forecasts. We also remain of the view that the OCR will be kept low for considerably longer than the market is currently pricing in," said O'Donovan in a research note on the five year-old index.

It showed a very sharp drop in employment confidence, and Westpac expected that "the 0.9% rise in employment in the official statistics for the December 2008 quarter will be more than unwound in Q1" 2009.

"After holding firm through most of 2008, employees are now admitting defeat," said O'Donovan.

In a single year, employment confidence has gone from a high point in December 2007, when a net 57% believed jobs were plentiful, to a new low of 54% of those interviewed believe jobs are hard to get.

"Jobs are now perceived as extremely hard to get, opportunities are seen to be few, and perception around current and expected earnings are well down," Wesptac said.

Consumer spending would remain weak, and people interviewed believed the jobs market would be weak for at least a couple of years.

Earnings expectations have also ground to a halt. 18-29-year-olds, who still registered slight net confidence about their jobs unlike the rest of the workfoce, had the biggest fall in confidence, nonetheless.

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