A cut in the official cash rate to 2.75% on Thursday is being seen as a sure thing by economists, and two retail banks are now saying the rate could fall below 2.5% by the end of the year.
Westpac chief economist Dominick Stephens has been a lone voice picking a fall in the OCR to 2% but now the ASB says the risks are skewed towards it eventually falling below 2.5%.
Back in June, the Reserve Bank cut the OCR and signalled it expected one follow-up cut at an unspecified date later in the year.
Soon after, New Zealand was subject to a shocking run of data. Global dairy prices plunged, economic growth measured by gross domestic product turned out weaker than expected and core inflation fell.
It became apparent the Canterbury rebuild had levelled off early and business and consumer confidence fell.
''All and sundry reassessed their interest rate, exchange rate and economic growth forecasts. In our case, we shifted to forecasting an immediate OCR cut in July and follow-up cuts that would rapidly take the OCR to an all-time low of 2%,'' Mr Stephens said.
At the July OCR review, the Reserve Bank cut the OCR 0.25% and bluntly stated: ''At this point, some further easing seems likely.''
Mr Stephens believed it was a clear signal a September cut would follow and the OCR would fall below 3%.
However, in a speech soon after the July OCR review, the Reserve Bank tried to rein in expectations of how far the OCR would fall.
The speech created an impression 2.5% was a line in the sand below which the central bank would not take the OCR except in recession.
''We don't think the Reserve Bank will be ready yet to entertain our view the OCR will need to go as low as 2%,'' Mr Stephens said.
''Our forecast of a 2% low in the OCR is not founded solely on pessimism about the economy. Rather, it's a view on what's needed to bring inflation back to 2% over the medium term.''
Developments since July had been mixed, although the negatives had outweighed the positives, he said.
Craigs Investment Partners broker Chris Timms said much had happened since the last Monetary Policy Statement on June 11.
Chinese shares had fallen 38.3%, US shares by 7.5% and New Zealand shares by 4.9%.
Oil prices had fallen 23.6% in US dollar terms and dairy prices were 7.3% lower.
The New Zealand dollar had fallen 8.9% against the US dollar and the five-year swap rate had fallen from 3.65% to 3.14%.
''It will be not surprising to see growth forecasts reduced further and the door left open for more OCR cuts.''
But, as had been the case during recent commentaries, the Reserve Bank would probably be noncommittal about the timing of any future easing, he said.
The upcoming Federal Reserve meeting could have a big influence on the action the Reserve Bank took in October.
A more dovish stance from the Fed - such as delaying the hiking cycle and doing nothing this month - would see the US dollar retreat slightly from current levels, putting pressure on the Reserve Bank to act more swiftly.
A rate rise by the Fed would have the opposite effect, Mr Timms said.
At a glance
• The Reserve Bank to cut the OCR 0.25% to 2.75% and signal a further move to 2.5%.
• Growth outlook for the next year will be much weaker; inflation pressures softer, even with the lower New Zealand dollar.
• The risks are skewed to the OCR eventually falling below 2.5%.
• New Zealand cash rate tied to the actions of the US Federal Reserve, which will also influence the value of the dollar.
