KEY POINTS:
The official cash rate could fall to a record low of 4 per cent as the economic outlook worsens and inflation fears fade, forecasters say.
The financial markets are fully pricing in another cut of a full percentage point to the OCR when the Reserve Bank next reviews
the rate on December 4, which would lower it 5.5 per cent.
Some forecasters expect the rate to bottom out at 4.5 per cent, as low as it has ever been, or even 4 per cent.
The economy has contracted in each of the first three quarters of this year and ANZ National Bank expects next year to be weaker still, with unemployment to rise to 6.5 per cent (from 4.2 per cent now).
The result of that, combined with much lower oil prices, would be quickly receding inflation and more aggressive easing in monetary policy, said chief economist Cameron Bagrie.
"We now expect the Reserve Bank to ease by 100 basis points at the upcoming December monetary policy statement and to follow that up with successive cuts of 50 basis points in January, March and April next year, taking the OCR to a trough of 4 per cent."
But this would only mitigate the severity of the economic downturn. "It will just help ensure [the inevitable adjustment] is not of the scorched earth variety," he said.
The Bank of New Zealand also expects another full percentage point cut on December 4, en route to an OCR trough of 4.5 per cent by the middle of next year - if not lower.
"Inflation is collapsing," BNZ head of research Stephen Toplis said. Although it hit an 18-year high of 5.1 per cent in the September quarter, half of that was down to petrol prices, which have fallen 29 per cent since then.
Lower dairy prices are also expected to reduce food price inflation and while the kiwi dollar's depreciation would push up the cost of imported goods, retailers would struggle to pass the costs on amid such weak consumer demand, Toplis said.
Eventually there would be some serious risks of inflation from the massive easing in monetary and fiscal policy now under way at home and abroad. "But this is a problem for the future."
Deutsche Bank forecasts growth among New Zealand's trading partners to be just 0.4 per cent next year - a tenth of what it was in 2007 and well below the 1.8 per cent assumed in the preliminary Treasury update released by outgoing Finance Minister Michael Cullen last week.
Deustche Bank chief economist Darren Gibbs said a full percentage point next month was the least the Reserve Bank would deliver.
"The global outlook is evolving in a way that suggests the OCR is heading towards 4.5 per cent over coming months, and possibly lower."
ASB chief economist Nick Tuffley said that with the markets calling for a full percentage point cut in December the Reserve Bank should not disappoint them when confidence remained fragile. "We expect it to bring the cash rate to 5 per cent over the next two meetings and then pause to evaluate."
RESERVE BANK OCR
* When the Official Cash Rate (OCR) was first adopted in early 1999 and in the wake of the post-Asian crisis recession it was 4.5 per cent.
* From mid-2007 until last July it was 8.25 per cent and has since been cut to 6.5 per cent.
HOW LOW WILL IT GO?
* ANZ National Bank: 4 per cent by April next year.
* Bank of New Zealand: 4.5 per cent, maybe lower.
* Deutsche Bank: 4.5 per cent, maybe lower.
* ASB: 5 per cent, then wait and see.
