Some economists are now picking a move in the interest-driving official cash rate as early as this week, when the Reserve Bank reviews its monetary policy statement tomorrow.
Just a few months ago, most economists were in agreement the OCR would not be shifted from its record low 1.75% until at least mid-to late 2020, but mainly the lack of inflation and signs of weakness in the economy have prompted the central bank to rethink its options.
Some in the markets are pricing in a 50:50 chance the OCR will move down by 25 basis points this week.
Last week US sharemarkets declined overnight after the Federal Reserve left its interest rate unchanged, reiterating it would stay patient with rates amid the mixed economic backdrop.
Inflation in New Zealand has remained stubbornly just below the mid-range of the target 1%-3% of the Reserve Bank for some time.
Westpac chief economist Dominick Stephens said the Reserve Bank's decision tomorrow will be a "close call''; whether to cut or hold.
"We think there's a 55% chance of an OCR cut and a 45% chance of an on-hold decision,'' he said.
The OCR decision was "on a knife edge'' and financial markets in general remained uncertain about whether the bank would reduce the OCR or not, he said.
ASB chief economist Nick Tuffley also said while the decision would be a "close call'', the new Monetary Policy Committee would have seen enough evidence to justify acting and will deliver a 25-basis point cut tomorrow and another 25-basis point cut in August.
He said the country's domestic activity outlook had deteriorated in recent months.
"Domestic growth tailwinds are not blowing as strong as they were, and 2018's 'soft patch' risks extending into 2019, as flagged by weak business sentiment surveys.
"Over a considerable period of time, the Reserve Bank ended up substantially overestimating 2018 growth and risks doing the same for early 2019,'' Mr Tuffley said.
Even if the OCR was not cut this week, Mr Tuffley said the weaker medium-term inflation and labour market outlook was likely to prompt Reserve Bank cuts in the coming months.
Whether or not the OCR was cut next week, Mr Stephens said he expected the Reserve Bank to reduce its OCR forecast to about 1.4%, due to concerns the domestic economy "may not have the juice'' to push inflation up to 2%.
Mr Stephens noted the decision would be the first taken by the Reserve Bank's new Monetary Policy Committee.
Analysis and drafting of the monetary policy statement would be overseen by new leaders, the bank having recently appointed a new chief economist, head of financial markets, and general manager of economics, markets and banking.
"To some extent the Reserve Bank will be taking a fresh look at the economy rather than rolling over previous analysis,'' Mr Stephens said.
- Otago Daily Times