The official cash rate is likely to remain unchanged at 2.5% on Thursday following considerable economic changes since the Reserve Bank's April OCR review.
In April, economists were calling for a further cut to the OCR, possibly to 2%.
Yesterday, economists were divided on whether there would be a further cut or a pause, although they expected Reserve Bank governor Alan Bollard to reiterate his message that interest rates would remain "lower for longer".
Among the economic changes experienced in the past six weeks has been the major improvement in credit markets.
Credit default swap spreads for the big four Australian banks, a rough proxy for the cost of funds facing the banking system, have narrowed.
Access to capital has improved markedly.
ANZ-National Bank chief economist Cameron Bagrie said the improvement had come from an extreme opening position, but it was still encouraging.
"Global equity markets have rebounded, as have commodity prices.
But this needs to be read as markets unwinding some of the systemic risk discount that had been priced in."
On the "real economy front", the global economy remained in the midst of a deep recession although recent global data was pointing to a slow rate of contraction, he said.
That suggested the pace of downward revisions to New Zealand's major trading partner growth forecasts was set to moderate and there could be modest upgrades for some economies.
However, while there had been improvements in credit conditions at the short end, there had not been the same improvement further out, he said.
The unemployment rate was set to rise further.
Despite improved confidence, firms still had little appetite to invest or hire.
Also, the dairy payout forecast for the 2009-10 season, at $4.55 kg/ms, set the tone for a further pull-back in rural spending and the associated multiplier impact that would entail.
Traditional monetary conditions had tightened since the April decision, with fixed mortgage rates moving up sharply, along with the New Zealand dollar.
"In this environment, we believe it is more likely than not the Reserve Bank will pause on Thursday.
"With the flow-on from the global scene now only starting to be felt within the economy, and financial conditions tightening, a further cut in the OCR is easily warranted.
"But against this backdrop we see considerably less pressure to ease," Mr Bagrie saidRates for longer-term fixed mortgages continue to rise, highlighting the limits to the Reserve Bank's influence ahead of an interest rate decision on Thursday.
Kiwibank yesterday lifted its five-year mortgage rate by 0.35% to 7.95%, following recent moves by some other banks, including BNZ, ASB and TSB.
Late yesterday, Westpac had the lowest five-year rate among the major banks at 7.6%, with the next closest at 7.85%.
Many banks had five-year fixed rates of 6.5% in March but started raising them when rates in the wholesale swap market started rising.
Variable floating rates now range between about 6% and 6.5%, while many one-year rates are around 5.5%.
ABN Amro Craigs broker Chris Timms believed the Reserve Bank would cut its OCR by 0.25% to show that the easing process would continue.
"The Reserve Bank will keep the pressure on for rate cuts but I don't believe there will be a change to banks' rates.
"A cut might give a little bit of relief on the currency."
Further cuts will give the central bank an opportunity to lift interest rates when inflation took hold again in about two years, he said.
