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Westpac economists predict the official cash rate (OCR) will likely drop to 5 percent by the end of the year. The bank has updated its forecast and now expects rate cuts in October and November.
Chief economist Kelly Eckhold stated that while the prediction has been moved forward by a month, there have been minimal changes to the overall forecast. “We foresee 25 basis points (bps) cuts in October and November, with another in February next year, and the next one in the May monetary policy statement. We still project the OCR to reach 4.5 percent by May next year, consistent with our previous predictions.”
Eckhold noted that the bank has significantly revised down its short-term economic growth forecasts. It expects the economy to have contracted by 0.6 percent in the second quarter and to record a slight decline in the third quarter as well.
“This, combined with the consumer price index nearing the top of its range and our weaker growth forecast, suggests a higher unemployment rate next year. All these factors indicate that the time for easing restrictions is now.”
He mentioned that if the Reserve Bank waited until November to act, it would have limited scope to implement easing measures before Christmas.
Eckhold also highlighted a 20 percent chance of an August rate cut. “It’s a significant shift in the bank’s perspective compared to previous communications. While it’s not impossible, it would represent a major change in their outlook. The Reserve Bank will likely adjust its forecasts in a similar direction, but an August cut would still be a substantial shift.”
He added that the bank is likely to signal a case for easing policy sooner but not necessarily implementing an easy policy immediately. “The time to move is approaching, but we don’t expect them to push interest rates into expansionary territory. This isn’t akin to the global financial crisis.”
SOURCE: RNZ