The Official Cash Rate (OCR) is likely to drop to 5% by the end of the year, Westpac economists say.

The bank has updated its OCR forecast, and now expects a drop in October and November.

Chief economist Kelly Eckhold said while Westpac had brought forward its prediction by a month, it had made relatively few changes to the rest of its forecast.

Reserve Bank Governor Adrian Orr presided over a time of rising inflation and interest rates - but now more economists are betting the OCR will be cut. Photo / Mark Mitchell, Herald montage
Reserve Bank Governor Adrian Orr presided over a time of rising inflation and interest rates - but now more economists are betting the OCR will be cut. Photo / Mark Mitchell, Herald montage

“We see 25bps (basis points) cuts in October and November and another in February next year, then we see the next one in the May monetary policy statement.

“We still get the OCR at 4.5% in May next year, which is what we’ve previously said.”

He said the bank had revised down its short-term economic growth forecasts “reasonably significantly”.

It expects the economy to have shrunk in the second quarter by 0.6% and to record a small drop in the third quarter, too.

“That, combined with the fact that the [consumer price index] is pretty close to the top of the range now and because we’ve got weaker growth forecast, there is a higher unemployment rate track next year … it all tells us that the time for delivering less restriction is here now.”

He said if the Reserve Bank waited until November to move, it would only have limited scope to deliver any easing before Christmas.

Eckhold said there was a 20% chance of an August cut.

“I still think that’s a relatively big shift in the bank’s view compared to what they’ve been talking about,” he added.

“You can’t say it won’t happen and I’m sure the Reserve Bank will be making adjustments to its forecasts in the same direction we’re going to be, but nevertheless it would be a big shift in view from them suggesting there would be an easing in August next year.”

He said the bank was likely to send a message that there was a case for easing policy sooner, but not to put in place easy policy.

“Hence the time to move is coming, but I’m not expecting them to tell us they want to move interest rates into expansionary territory … this is not the Global Financial Crisis.”

-RNZ