The Reserve Bank will cut its official cash rate on Thursday but economists are saying that a low interest rate might not be enough to save the New Zealand economy.
ASB chief economist Nick Tuffley said he expected the central bank to cut the OCR by 1% to 2.5% on the back of a further deterioration in the global economic outlook.
Forecasts for global growth continued to be revised down and ongoing pessimistic data pointed to further down-side risks.
"Offshore financial systems remain weak, with United States authorities still struggling with bail-out plans for the banking systems."
The European economy was looking vulnerable, while in New Zealand, the economic outlook also continued to deteriorate, he said.
New Zealand was set for some sizeable falls in GDP in the foreseeable future.
"Compared to Australia, monetary policy is less immediately potent and fiscal stimulus more constrained, pointing to the need for lower interest rates."
There was a risk the Reserve Bank might opt for a smaller OCR cut, given the Australian central bank left its rates unchanged last week.
Market pricing had the cut at 0.5%, Mr Tuffley said.
If the Reserve Bank did cut by less than 1%, future OCR cuts would be drawn out.
The ASB still remained convinced a 2% cash rate was appropriate for New Zealand.
The Australian central bank kept its rates on hold, leading some people to interpret that as a signal the New Zealand bank might opt for a small cut, he said.
"We do not see this as the case. Even with Australia's 0.5% contraction in fourth quarter GDP, the Australian economy is faring remarkably well, compared to New Zealand and the rest of the world.
"In Australia's favour are more immediate transmission of monetary policy easing and much greater scope for fiscal spending."
The majority of Australian mortgages were on floating rates, which meant the RBA's cash rate cuts had been directly and immediately passed on to borrowers.
In New Zealand, the preference to fix over the past few years meant many households were yet to benefit from lower interest rates, Mr Tuffley said.
However, even at a 2% cash rate, the Reserve Bank would continue to have plenty of scope for further cuts, should it need to take further action.
But at some point the central bank needed to think about other strategies it could employ that might be more effective at restoring business confidence and shoring up economic activity than further lowering the cash rate, he said.
One issue that was starting to emerge was upward pressure on longer-term rates - both domestically and internationally.
Part of the rise reflected an increase in corporate bond issuance and concerns around large issuance of government debt globally, with the US set to issue nearly $US2 trillion ($NZ4.2 trillion) this year.
In addition, shifts to long-term mortgages would also put pressure on New Zealand long-term rates resulting from balance sheet hedging.
The rise in longer-term interest rates, while mostly reflecting a return to the "normal" yield curve, translated to tighter monetary policy, particularly in the US.
The Federal Reserve had expressed its intention to intervene in longer-term debt markets should rates start to increase, Mr Tuffley said.
"The Reserve Bank also needs to consider contingencies for when and how it might become involved in New Zealand interest rate markets, be it committing to holding the OCR for a long period or purchasing long-term assets such as New Zealand government or corporate bonds.
It may never use such plans but 'be prepared' is a good motto," he said.
