KEY POINTS:
Economists are expecting a historic move by the Reserve Bank (RBNZ) when it reviews the official cash rate (OCR) this month - with some forecasting a cut of 100 basis points to 6.5 per cent.
The speculation follows yesterday's decision by the Reserve Bank of Australia (RBA) to cut the Australian cash rate by 100 basis points to 6 per cent.
The RBA move was bigger than the 50 point fall economists had predicted. It was the first 100 point cut to the cash rate since May 6, 1992, when the RBA lowered the cash rate to 6.5 per cent.
ANZ senior market economist Khoon Goh predicted the New Zealand rate would also be cut by 100 points - the biggest ever cut in New Zealand.
The OCR was cut by 50 points following the September 11, 2001 terrorist attacks and has been raised by that amount, but never by any more.
"Of the two economies it is the New Zealand economy that has contracted so far this year. The RBA movement was pre-emptive of a similar contraction," Goh said.
The "rather aggressive easing" of the interest rate to 6.5 per cent would help to stabilise the economy, he said.
ASB and BNZ both predicted a 75 point drop to 6.75 per cent.
ASB chief economist Nick Tuffley said the bank expected a 75 point cut in October to be followed by a further 50 point cut in December and 25 point cut in January to take the OCR to 6 per cent.
He said the probability of a 75 point cut in October was 50 per cent, 40 per cent for 100 points and 10 per cent for 50 points.
"A lot will depend on how events pan out over the next two weeks. But given that market pricing is gravitating towards a 75 point cut, that is essentially the minimum."
Tuffley said the Australian and New Zealand central banks had "displayed a fair degree of pragmatism".
BNZ currency strategist Danica Hampton said the Australian cut "raises the risk of the RBNZ taking aggressive action".
She said a 100 point cut should not be ruled out.
"While central banks shouldn't make knee-jerk decisions based on fluctuations in financial markets, the increased risks to global growth, escalating cost of funding and yesterday's relatively soft NZIER quarterly survey of business opinion leaves us more convinced than ever that the OCR is headed for 5.50 per cent - lower than the RBNZ and market have assumed".
The RBNZ's OCR announcement is on October 23.
- NZPA
