KEY POINTS:
Even after yesterday's unprecedented rate cut of 150 basis points, the Reserve Bank may be only two-thirds of the way through its easing phase as it leans into hurricane-force headwinds from the global economy.
Governor Alan Bollard has brought the official cash rate down from 8.25 to 5 per cent in a little over four months, dwarfing the 175 basis point easing which followed the tech wreck and September 11 attacks seven years ago.
But market economists are increasingly picking 3.5 per cent as the trough in the OCR cycle, to be reached in the second quarter next year.
"It's a surreal world when your ever-conservative central bank slashes its cash rate by 150 basis points and no one bats an eyelid," said Bank of New Zealand economist Stephen Toplis.
The Reserve Bank's monetary policy statement said "some further, but significantly smaller, reductions in interest rates may be warranted". Its projection for 90-day bank bills imply an OCR of 4.5 per cent by the end of next year.
But that is based on a growth outlook which, though very subdued in the short term, was seen by several private sector forecasters as on the optimistic side.
The bank's forecasts imply the economy, after contracting in the first three quarters of 2008, has already technically exited a relatively shallow recession - a bird bath rather than a blood bath.
But it expects growth to remain below par through to the second half of next year and acknowledges the timing of the eventual rebound to be hostage to a very uncertain and darkening global outlook.
"Indeed, further quarters of negative growth in early 2009 are quite possible," the bank said.
With the United States, Europe and Japan all contracting and the rest of Asia at half-speed, New Zealand's trading partners are expected to grow next year at less than half their 2008 rate and a quarter of the rate last year.
And the risks are that it will be worse, "particularly given the potential for slowing activity and adverse financial conditions to reinforce each other".
Tourism will be a major casualty until the combination of a low dollar and recovery in source countries kicks in in a couple of years.
Export commodity prices and the exchange rate are seen as having further to fall. And the bank sees house prices as about halfway through a 16 per cent decline peak to trough.
It expects consumer spending to remain subdued through 2009.
"While some relief is coming from lower fuel prices, personal tax cuts and falling mortgage rates, the cost of living remains well above year ago levels and the effective [average] mortgage rate remains high."
The bank regards monetary policy as expansionary now and says that combined with a lower dollar and the fiscal stimulus in train it will provide "substantial support" to demand and create the conditions for a rebound in growth as and when the global environment improves.
Westpac chief economist Brendan O'Donovan said the job market would be key.
Spending would lift as households' cashflow improved.
"There will be a bit of rebound in the December quarter. But it's likely to be the last hurrah. There will be a lot of lay-offs in the new year."
Goldman Sachs JB Were economist Shamubeel Eaqub said that with the gap between wholesale and retail interest rates twice as wide as normal, monetary conditions were tighter that a 5 per cent OCR would normally imply.
The worst of the recession is yet to come - over the next six to nine months, he believes - and he expects the OCR to drop to 3.5 per cent.
ANZ National Bank chief economist Cameron Bagrie said the Reserve Bank was "far from done".
He expects three more cuts, of 50 points apiece, reducing the OCR to 3.5 per cent by April.
