KEY POINTS:
The money markets believe governor Alan Bollard will match the Reserve Bank of Australia's 75-basis-point cut when he reviews the official cash rate on December 4, but some economists are not so sure.
Before the RBA's surprisingly deep cut on Tuesday, the market was looking for a 50-point cut by the New Zealand central bank.
Now it has fully priced in a 75-point cut and sees a decent chance of a repeat of October 23's 100-point cut.
Goldman Sachs JBWere thinks 100 points is eminently justified, but Westpac and the Bank of New Zealand feel the market is getting overexcited.
"We see a 60 per cent probability of 50 points, 30 per cent of 75 points and a 5 per cent chance of either 100 or 25," said BNZ economist Stephen Toplis.
Westpac economist Doug Steel said that when Bollard cut by 100 points last month he had been at pains to warn people not to expect another cut of anything like the size of that one.
Westpac still expects a 50-point cut on December 4, but if there was a very steep rise in unemployment in the data due out this morning - say to more than 4.5 per cent - that would increase the chances of more than 50.
Announcing the cut in Australia's OCR from 6 to 5.25 per cent, RBA governor Glenn Stevens cited signs that China and other parts of the developing world were slowing and falls in world commodity prices.
Goldman Sachs economist Shamubeel Eaqub said expectations for global growth had gone down sharply.
"Our estimate of growth among New Zealand's major trading partners has shrunk from 3.1 per cent at the start of the year to 1.8 per cent now - similar to the Asian financial crisis.
"And with unemployment set to rise we would not see much relief in the domestic economy either."
The gap between wholesale (swap) interest rates, which the Reserve Bank can influence, and retail mortgage rates, which also depend on the price and availability of imported credit, is about twice as wide as normal.
That meant the level of the official cash rate was not nearly as accommodative as historical relationships would suggest, Eaqub said.
The high proportion of fixed-rate mortgages meant the Reserve Bank had to deliver large and rapid moves in the OCR to provide relief to borrowers, many of whom would be coming up for an interest rate reset next month.
In addition the Australian dollar had weakened more than the kiwi, pushing the Tasman exchange rate to a difficult level for exporters, he said.
"If it stops there and Australia slows down as we expect, it will be damaging for New Zealand, which after all is already in recession."
He said the Reserve Bank had lots of room to cut rates and should use it.
Toplis said the exchange rate reflected a surprisingly severe shift in expectations for growth in Australia, China and India and in commodity prices. "Those factors don't affect New Zealand anything like as much."
It was nonsense to suggest the Reserve Bank "had to catch up" with the RBA, he said. More important was asking where the rate cuts would stop.
