Despite a better-than-anticipated recovery from the Covid-19 pandemic, according to economists in Westpac, the Reserve Bank will still need to slash the official cash rate to negative territory next year.Indicators of market optimism, such as the June BusinessNZ Services Performance Index, show a solid bounce-back for the New Zealand economy, approaching pre-Covid levels.
"This doesn’t necessarily mean that policymakers can take their foot off the accelerator though," the Westpac team says.
"Low inflation is likely to remain a feature in the years to come, and monetary easing will need to continue beyond the guidance that the Reserve Bank has given to date."
Westpac expects that the Monetary Policy Statement next month will see the Reserve Bank expand its bond-buying program by $20 billion. But the bank says the RBNZ "will start running out of government bonds to buy".
"We expect that the RBNZ will cut the OCR to -0.5% in April 2021, in order to maintain the overall level of monetary easing that the economy will need."
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