17 Jul 2015

Economist predicts record OCR low

9:39 am on 17 July 2015

An economist is predicting the Reserve Bank will cut the Official Cash Rate (OCR) to a record low of 2 percent to combat weak inflation and tumbling dairy prices.

Reserve Bank of New Zealand

Economist Dominick Stephens is predicting the Reserve Bank will cut the OCR to 2 percent. Photo: RNZ / Alexander Robertson

Dairy prices fell to a six year low at this week's international auction, pushing the New Zealand dollar to its lowest level since 2009.

Official figures show the Consumers Price Index rose 0.4 percent in the three months to June, taking annual inflation to 0.3 percent - well below the bank's 1-3 percent target .

Westpac chief economist Dominick Stephens said lower dairy prices would dent demand throughout the economy.

"We think [the Reserve Bank] will have to reduce the OCR to 2 percent by the end of the year, " said Mr Stephens. "That'll be a record low."

The OCR is at 3.25 percent, and the lowest it has been is 2.5 percent.

Mr Stephens said it was possible the central bank could cut rates by half a percentage point at its next review, on Thursday next week, but it was more likely to hold off until September.

By then, the faltering economy would see the housing market turn and give the Reserve Bank room to cut further.

He expected the central bank to further tighten lending restrictions, in case the housing market got a second wind from low interest rates.

"I suggest the Reserve Bank will be concerned enough to tighten further its macro prudential policies at least for Auckland sometime early next year."

But some economists warn that inflation pressures may be building, even as the economy falters.

The head of research at BNZ, Stephen Toplis, has said the falling dollar may limit the central bank's choices.

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