Reserve Bank governor Alan Bollard is expected to cut the official cash rate by an unprecedented full percentage point on Thursday, as he seeks to moderate the flow-on effects of carnage in international financial markets.
The markets have fully priced in a cut of 100 basis points in the OCR to 6.5 per cent, according to Credit Suisse's swap-based indicator.
In the latest Reuters survey, 12 of the 16 economists surveyed called a 100-point cut as well, although they don't discount the possibility Bollard will go to "only" 75 points.
This is despite expectations that Statistics New Zealand will report tomorrow that consumer prices rose 1.5 per cent in the September quarter, pushing inflation to an 18-year high of 5.1 per cent.
"Normally an inflation outcome in the vicinity of 5 per cent would set off blaring warning sirens within the Reserve Bank," said ASB chief economist Nick Tuffley. "However those sirens have to compete with some very strident ones coming from the deteriorating global financial system."
Since Bollard surprised the market with a 50-basis-point cut in the OCR six weeks ago, the credit crunch has turned in a full-blown global crisis.
Credit markets froze and show only tentative signs of thawing, despite vast sums being poured on them by central banks and Governments. Meanwhile, trillions of dollars have been wiped from the value of shares and a global recession is widely forecast.
Domestically, the economic data show little sign the economy is shaking off a recession already nine months long. Retail sales in August were only 1.3 per cent higher in dollar terms than in August last year.
With inflation running hot, that suggested they contracted in real terms in the September quarter as they had in the previous two, First NZ Capital economist Jason Wong said.
Annual growth in household debt in August was the lowest for seven years. Business borrowing was also down. How much this reflects people voluntarily hunkering down and how much banks starting to tighten the availability of credit is a moot point.
House prices in the September quarter were 5.8 per cent lower than a year earlier, Quotable Value said. The Reserve Bank, Treasury and other forecasters expect further declines.
The New Zealand Institute of Economic Research's quarterly survey of business opinion recorded a sharp rise in the number of firms reporting a decline in their activity. Economic growth is now at levels last seen during the 1991 recession.
Bank of New Zealand chief economist Tony Alexander said the potentially deep global recession would suppress growth by pulling back commodity prices, reducing demand for manufactured exports and hitting the tourism sector.
Since the Reserve Bank last reviewed, and cut, the OCR, the dollar has fallen 5.6 per cent against the US dollar but climbed 9.5 per cent against the Australian dollar.
While a weaker exchange rate makes it cheaper for tourists to visit New Zealand, Alexander said historically visitor numbers were mainly determined by what was happening to confidence and incomes in their own countries.
Westpac chief economist Brendan O'Donovan said that in July and September Bollard had expressed concern that the OCR cuts would not be passed on in full - or at all - to retail interest rates, because of the costs banks faced in raising funds abroad.
"By and large," said O'Donovan, "those fears have not been realised."
* Alan Bollard says he has "plenty of room" to cut interest rates and the markets are looking for him to cut the official cash rate from 7.5 to 6.5 per cent on Thursday.
* That would be the steepest cut since the OCR was introduced and testifies to the gravity of the international credit crisis.
* While inflation is running at 5 per cent or so that is seen as the peak, with oil prices now falling and firms finding it tough to pass on cost increases.