DON'T EXPECT INTEREST RATES TO DROP AS LOW AS THEY HAVE IN PAST DECADE - ECONOMIST

It appears ultra-low interest rates are a thing of the past. 

That's because what's known as the neutral official cash rate (OCR) is moving its way up, independent economist Cameron Bagrie told AM on Tuesday. 

The neutral official cash rate is consistent with economic activity and inflation going neither up nor down; where the Reserve Bank doesn't "have its foot on the accelerator or the brake", as Bagrie explained. Ecoin

"So, obviously, with the OCR at the moment up at 5.5 (percent) - that's the Reserve Bank with the foot on the brake," he said. 

"Now, if we go back to 2000, the neutral OCR was up around 6 percent for a combination of big structural changes around the globe. We saw what's called the neutral OCR drop from about 6 to an estimated 2 percent and physical borrowing rates followed that trend down." 

However, Bagrie said the neutral OCR in today's economic climate was moving up. 

In fact, he felt COVID-19 and pre-pandemic interest rate lows were a thing of the past. 

"Inflation's looking a little bit more persistent; we're starting to see a little bit more of what's called a 'term premium' creep into international financial markets as governments are loading up a lot more debt; [and there are] geopolitical risk premiums," Bagrie said. 

"So, the neutral OCR is starting to rise again - what does that mean in practice? Over the coming 24 months, when the official cash rate will come down at some stage... don't expect interest rates to go back to those levels we've experienced over the past 10 years on average. 

"It's not just because of what's called the business cycle or where the Reserve Bank is going to set the OCR - there are some structural reasons that suggest [the] neutral or equilibrium OCR is moving up as we speak."  

Regardless of where the neutral OCR lands, experts have said the rough ride for New Zealand's economy remained and a hard landing was increasingly likely.

Inflation, at 4 percent, was still some way from the Reserve Bank's 1-3 percent target range and the unemployment rate was expected to rise above 5 percent in the coming year. 

Infometrics expected the neutral OCR to land at about 4 percent by the end of next year.

2024-04-22T22:17:58Z dg43tfdfdgfd