KEY POINTS:
It is a sign of the perilous times that the question dividing market economists about Thursday's official cash rate review is whether the Reserve Bank will cut by a record-equalling 100 basis points or an even more emphatic 150.
Reuters' most recent survey found seven of the 16 forecasters polled calling for the OCR to be cut from 6.5 to 5 per cent. The four main local banks are in the 100-point camp, but none of them is ruling out a larger cut.
A high level of certainty about the economic slowdown means the bank can afford to move quickly.
"The Reserve Bank knows the end point is not going to be 5.5 per cent, that it's likely to cut rates below that. So it can afford to make a large cut and not risk rates undershooting," said ASB chief economist Nick Tuffley.
He now expects the OCR ultimately to fall to 4 per cent.
Westpac economist Michael Gordon said that since the OCR review six weeks ago, the global credit crisis had continued to unfold at an astonishing pace.
"The past month has seen heavy falls in commodity prices, new lows in world equity markets and the near-failure of Citigroup, which was the world's largest bank by market capitalisation as recently as last year."
The G7 group of leading industrial powers are simultaneously contracting for the first time since 1982, and while Asia and Australia would continue to grow it would be at a much slower pace than in recent years.
The Reserve Bank of Australia also reviews interest rates this week, and the market is expecting a deep cut there to add to the 200 basis points it has already dispensed.
The Reserve Bank of New Zealand will slash its growth forecasts for next year, Gordon expects, to be closer to zero than the 1.5 per cent it was contemplating in September, with any prospect of recovery pushed out until 2010.
Not all the news has been bad, however.
Tuffley said the bank would be pleased at the rate OCR cuts had been passed through to retail lending rates.
"Mortgage rates have come down a long way, and at last existing borrowers will be rolling off on to lower rates than they have been paying. A few more decent cuts and we will have loan rates which would - ordinarily - stimulate a lot of demand."
Gordon said that this year a growing number of borrowers had moved to terms of a year or less.
"As a result mortgage rate cuts are set to flow through to the average homeowner far more quickly than rate increases did over the last few years."
Three other factors were adding to the economic stimulus, he said.
The exchange rate has tumbled to the point that, on a trade-weighted basis, it is more than 12 per cent lower than the Reserve Bank's assumed average for the first half of next year. On average that had so far been enough to offset the fall in world prices for export commodities, he said.
Second, oil prices have fallen by around two-thirds from their peak and even with a lower dollar that has brought consumers considerable relief.
It is one reason analysts expect inflation to drop from more than 5 per cent now to around 1 per cent in a year, allowing the bank to focus on recession mitigation rather than inflation fighting.
Third, fiscal policy is also being eased sharply.
Finance Minister Bill English has said that the cumulative effects of increased spending from the last Budget, the October tax cuts and those to come in April next year, and other measures, amount to a fiscal boost equivalent to 4 per cent of GDP over the current and coming June years.
Gordon said:
"Our feeling is that a 100 basis point cut, plus a weaker currency, plus lower mortgage rates, plus the sharp fall in fuel prices, plus tax cuts is enough to tide the Reserve Bank over until the next review in January.
"However we concede they could easily decide to do more than enough. Since July they erred on the side of earlier and larger rate cuts and with the benefit of hindsight have little reason to regret it."
HOW BIG A CUT?
* Economists are split on whether governor Alan Bollard will cut the official cash rate 150 basis points - to 5 per cent - or "just" 100.
* The swaps market has split the difference and is pricing in 125 points.
* The Reserve Bank is expected to forecast next to no growth next year, despite lower mortgage rates, lower petrol prices and tax cuts.
