KEY POINTS:
The money markets regard a cut in the official cash rate from 5 to 4 per cent on Thursday as in the bag and see about a 50:50 chance that governor Alan Bollard will drop the rate to 3.5 per cent.
Since last July the Reserve Bank has
lowered the OCR by a cumulative 325 basis points, dispensing ever-larger cuts as the flow of economic data, foreign and domestic, has worsened markedly.
Since the December review, when he cut by 150 basis points, economists' forecasts of growth among New Zealand's trading partners have been slashed, to the point where they are now expected to contract this year. Hopes for an export-led recovery are accordingly dashed.
At the time of the December review consensus forecasts for trading partner growth in 2009 were 1.2 per cent - feeble by historical standards but still positive.
It suggested the world was facing a recession comparable to the early 1980s when global growth slowed to 0.9 per cent, Westpac chief economist Brendan O'Donovan said.
But the January consensus forecasts are for their collective gross domestic product to shrink by 0.1 per cent.
ASB chief economist Nick Tuffley said more downward revisions were a given and a 1 per cent contraction in trading partners' economies this year was a realistic possibility.
And on the home front the Institute of Economic Research's quarterly survey of business opinion (QSBO) was exceptionally weak and put paid, O'Donovan said, to hopes that the contraction in the New Zealand economy would be limited to the first three quarters of 2008.
Firms' expectations of their own activity are the weakest in nearly 40 years, and their investment and hiring intentions plunged.
"We now expect several more quarters of negative GDP growth," O'Donovan said.
In addition export commodity prices have fallen and offshore credit markets remain tight - important when the banks rely on imported credit for over a third of their funding.
O'Donovan said key questions about the potential severity of the recession had been resolved, but all in an adverse way.
One was the extent to which recession in developed countries would affect Asian economies; the recent data from that part of the world has been grim.
Second was how much of the boost to households' cashflows from lower petrol prices, tax cuts and mortgage rate cuts would be saved rather than spent. Quite a lot, retail and credit data suggest.
Third was how the labour market would respond. In the QSBO a third of firms said they expected to reduce staff numbers over the next three months.
O'Donovan concludes that the Reserve Bank will cut official cash rate to 2.5 per cent by the middle of the year. If so, a cut of 100 basis points on Thursday would be the minimum, he said.
"The case for an even larger move is finely balanced, but we think that the weak QSBO and the downgrades to world growth forecasts argue for a 150 basis point cut," he said. "It's not just the weaker outlook but the certainty that things are getting worse that argues for the bank to move quickly."
The consensus view among market economists in the latest Reuters poll is that the bank will cut by 100 basis points but several, including ASB's Tuffley and Deutsche Bank chief economist Darren Gibbs would not be surprised if Bollard cut more aggressively than that.
ANZ National Bank chief economist Cameron Bagrie - who picks the economy to contract by close to 2 per cent this year - expects a cut of 100 basis points, to what would be a new low for the OCR, and a statement leaving the door open for more.
The Reserve Bank was getting traction through mortgage rates, he said, and there were other sources of stimulus in the system in the form of fiscal policy and a lower dollar.
Two-year mortgage rates from the banks are clustered around 7 per cent, down some 250 basis points from their peak in March and April last year. Floating rates have fallen more than 300 points in the same period.
Bollard's choice
* Governor Alan Bollard is expected to deliver the third jumbo-sized interest rate cut in a row when he reviews rates on Thursday.
* Most market economists are expecting a full percentage point cut in the official cash rate to a new low of 4 per cent.
* A couple are picking 1.5 percentage points. Why wait, they ask, when the end-point of the OCR is expected to be below 3 per cent?
