Graeme Wheeler has struck the right note

Cutting the OCR 50 basis points to 2.75 per cent might have triggered the reaction: Things must be worse than we thought, Herald Economics editor Brian Fallow says. Photo / Mark Coote

Reserve Bank governor Graeme Wheeler has struck the right note in this morning's official cash rate announcement: appropriately dovish but not alarmist.

He delivered the 25 basis points cut to 3 per cent the markets expected and the forward guidance strengthened the easing bias: "Some further easing seems likely" where six weeks ago it was "further easing may be appropriate".

But he has resisted calls for an immediate 50 basis points cut to 2.75 per cent, which in the context of fragile sentiment might have triggered the reaction: Things must be worse than we thought.

Inevitably the bank has revised down its view of how fast the economy is growing right now, to an annual rate of 2.5 per cent from 3 per cent last month. And the growth outlook has softened as well given the sharp fall in dairy prices and the fact that the Canterbury rebuild appears to have peaked.

As for inflation, surprisingly, the bank expects inflation to be close to 2 per cent by early next year.

That is despite the fact that non-tradables inflation is running at its weakest rate for 14 years and, like other forecasters, the bank is uncertain how quickly the lower exchange arte will feed through into higher consumer prices.

The kiwi has evidently not fallen enough for the bank's liking however: "Further depreciation is necessary."

On the international front the bank sees moderate growth but heightened uncertainty not only emanating from China and Europe but also about the impact of the US Federal Reserve's expected tightening.

In New Zealand growth is supported by low interest rates and high net immigration, and by construction activity where the baton has passed from Christchurch to Auckland.