The final interest rate review of the year has markets guessing on whether the Reserve Bank will deliver a cut before Christmas or face a three month wait.

On Wednesday afternoon governor Adrian Orr will release new forecasts which are likely to see the Reserve Bank cut its growth forecasts for 2020.

Coming a week after labour market figures showed slowing job creation, most economists expect the official cash rate (OCR), a benchmark rate which influences other bank rates, will be cut to 0.75 per cent, a new record low.

But the pricing of financial instruments tied to short-term interest rates show traders are divided, with swap rates on Friday suggesting around a 60 per cent chance of a cut, making the decision live. A number of commentators have urged the bank to wait.


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Westpac chief economist Dominick Stephens predicts that Orr and the committee will leave the OCR unchanged at 1 per cent, waiting until the next meeting in mid-February to cut.

Stephens said that financial markets were behaving as if the Reserve Bank had "almost promised" it would cut, when the tone of its September update had been completely neutral.

While Westpac expects the Reserve Bank to pare back its growth forecasts, Stephens said recent data such as building consent figures and electronic card transactions suggest the economy is firming.

Meanwhile the exchange rate was lower than the central bank believed it would be three months ago.

Stephens admitted market pricing could influence decisions, which could push the central bank to cut.

While the Reserve Bank had been willing to deliver surprise moves since Orr became governor, so far the only surprises had been delivering more interest rate cuts, or sooner.

"What we know about the current Reserve Bank management is that they're not afraid to deliver a downside surprise. We'll find out whether they are willing to deliver an upside surprise."


A day before the decision is released, the Reserve Bank will release its quarterly survey of expectations.

In August this showed a sharp drop in the outlook for inflation, which appeared to influence the Reserve Bank's decision to deliver a 50 point interest rate cut.

Since August, business confidence had declined and growth indicators had been weaker, suggesting the Reserve Bank's expectation that the economy would expand by 3 per cent in 2020 was out of step with other forecasters.

ASB chief economist Nick Tuffley said there was now "a yawning chasm" between ASB's forecasts and the Reserve Bank's.

With the central bank facing a three month break before its next OCR review - double the usual period because of a Christmas break - the "path of least regret" appeared to be to cut interest rates now.

Tuffley said there had been enough news to justify an interest rate cut now, while a decision to hold could push up retail interest rates.


A large volume of households were on fixed rate mortgages which would be up for renewal before Christmas, Tuffley said, while others on floating rate mortgages hoping to secure the lowest rate possible may scramble to fix if they thought interest rates had reached a nadir.

"We can envisage a scenario where they don't go, they cause a little bit of a lift in interest rates and then you start to get a bit of a stampede, that drives up rates even higher," Tuffley said.