Economists at New Zealand largest bank warn economic growth appears to be cooling, opening the possibility of future interest rate cuts.
ANZ chief economist Cameron Bagrie has also predicted that government fiscal policy, in the form of tax cuts, will become one of the drivers of the economy in 2018 when it would be “a lot looser than what’s being openly acknowledged at the moment”.
On Thursday the Reserve Bank will review the official cash rate (OCR) which economists agree will see no change to the benchmark interest rate.
As well as coming amid coalition negotiations, the decision is the first which will be undertaken by acting governor Grant Spencer, who will head the bank for six months until the incoming government appoints a new governor.
READ MORE: RBNZ Governor Graeme Wheeler won’t seek another term
The OCR – which typically has a direct influence on mortgage and savings rates – is expected to stay unchanged for at least another year as the economy struggles to generate inflation.
ANZ has said that while it still expected the next move in the OCR to be up, this was “not a strongly held view” and a case could be made for lower interest rates.
Bagrie said the economy was now “running below trend” with the sectors which tended to boom during the stronger periods in the economic cycle all either slowing or set to slow.
“We’re past peak construction, we’re at peak migrant and we’re probably at peak tourist,” Bagrie said.
“When the pro-cyclical parts of the economy come off the boil you’re just not going to get a big excess demand story that’s going to lift core inflation.”
Construction activity shrunk in both of the first two quarters of 2017, Statistics New Zealand said on Thursday, while other official figures showed net gains from migration have fallen slightly from record highs. Visitor arrivals, at 3.7 million in the year to August 31, remain at a record high.
Bagrie said inflation could still rise in 2018 as the New Zealand dollar falls, and tax cuts and government spending increases come if National is able to form a fourth term government.
“I think fiscal policy is going to be a lot looser than what’s being openly acknowledged at the moment,” Bagrie said, with tax cuts and other spending plans due to come into force in April 2018 equivalent to about 1 per cent of gross domestic product.
During the election campaign National Party leader Bill English signalled another families package before the 2020 election.
“I think fiscal policy’s going to be pretty relevant in terms of what’s going to be pushing the economy along in the next couple of years.”