Interest rate cut this week is certain but all eyes will be hunting for clues to the future.

On Thursday we find out if the Reserve Bank will move the official interest rate up, down - or leave it unchanged. At this point the result is as foregone as the All Blacks upcoming World Cup pool game versus Namibia. It's going down.

Having backed up the truck to cut the rate in June and July, on a worse than expected dairy price slump, the Reserve Bank isn't going to stop now.

If anything, global market turmoil and concerns about the Chinese economy have made two more cuts to the official cash rate (OCR) a near certainty. But that shouldn't take the fun out of the occasion on Thursday morning.

When Reserve Bank Governor Graeme Wheeler delivers his monetary policy statement, the nation's economists, currency traders and business journalists will hang on every word with the passion of a football fan watching Ma'a Nonu run in his fourth try from inside the 20m line.


They'll be looking for a magic line - or the absence of it - in the speech. There's always one. It represents the subtle shifts in Reserve Bank thinking which the markets use to try to predict the track for future moves.

It's a phrase that moves the dollar and determines how much you'll pay when you next visit the bank to fix your mortgage rate.

In April 2008 when Global Financial Crisis clouds were just looming, the then Governor Alan Bollard left rates unchanged at 8.25 per cent. But he was widely interpreted to have darkened his outlook with the removal of just one word.

Where, in March, he had said he expected rates to be on hold "for a significant time yet" he now said: "for a time yet".

The absence of the word "significant" was deemed to be highly significant, indeed. Did it represent the high-tide mark for sky-high rates? Well, we know what happened next. It did.

In 2010 when the market was looking for signs of recovery, Bollard dampened expectations by removing the word "respectable" from his description of the economy.

"You never want to read too much into such word changes," said ANZ chief economist Cameron Bagrie at the time - before proceeding to accurately dissect and interpret those words. "But clearly the Reserve Bank has given itself wriggle room to move on the growth front and hence pause in September".

It's true we probably shouldn't read too much into them but we will, because the market will.


With Thursday's rate cut a virtual certainty it is now priced in by markets and is flowing through to retail interest rates.

There's already been a fair bit of rate war action going on with banks dropping some fixed rates as low as 4.35 per cent in the past week.

But what next? Fixed rates for longer than six months require those setting them to do some pretty fancy modelling to ensure they give nothing away.

At this stage markets have two cuts priced in - taking the OCR from 3 per cent today to 2.5 per cent.

In his preview, ASB chief economist Nick Tuffley picks the bank will cut to 2.5 per cent and hold there for all of 2016 and most of 2017.

Over at Westpac they are even gloomier, with chief economist Dominick Stephens still picking the Reserve Bank may need to cut to a record low of 2 per cent.

But Stephens accepts the Reserve Bank probably doesn't see it that way yet. He expects we'll get wording in line with the consensus view of a cut to 2.5 per cent and then a "wait and see".

He's even had a go at picking Wheeler's words. "Whereas July featured a blunt signal that another cut would soon follow, we suspect September's policy guidance sentence might be more along the lines of 'At this point, some further easing seems likely. The timing will depend on the data'," Stephens writes in his preview.

A very open-ended statement seems most likely but any slight deviation from that kind of language will be big news.

What does the bank make of the market turmoil? Is it happy with the fall of the dollar so far? Are the two dairy price bumps we've seen in the past month enough for renewed confidence? Is inflation still dormant? Have Auckland house prices peaked?

These factors and many more create a highly complicated equation from which the Reserve Bank must distil a binary result, setting the direction up or down.

But there will be shades of colour in the message. There will be guidance as to optimism, pessimism, timing and extremity of future moves coded into the few short paragraphs delivered on Thursday morning.

You can be sure that not one word will be left to chance. Graeme Wheeler's speech will be constructed with the precision and care of a poet. That's the beauty of it all.