OCR preview: Massive rate cut expected next week

Reserve Bank governor Alan Bollard is likely to cut interest rates by an unprecedented amount next week to counter continuing turmoil in financial markets and the rapidly deteriorating global economic outlook.

Friday, October 17th 2008, 4:54PM

by Jenny Ruth

Of the 13 economists surveyed by GoodReturns, 10 are expecting a 100 basis point cut in the official cash rate (OCR) on Thursday and the other three are forecasting a 75 point cut. The OCR currently stands at 7.50%.

The central bank has never moved the OCR by more than 50 basis points at a time since it introduced the measure in March 1999.

"The risk is they will do more," says Hayden Atkins at Macquarie who is picking a 100 point cut. "It’s looking pretty horrible."

Nick Tuffley, chief economist at ASB Bank, who is calling 75 points, says its looking increasingly likely Bollard will cut 100 points because that’s how much the wholesale interest rate market has already priced in.

When he made the 75 point forecast, he had been expecting international markets to settle down which hasn’t happened yet, Tuffley says.

Stephen Toplis at Bank of New Zealand, who is also picking 75 points says: "There no difference as far as we’re concerned. We’re in unchartered territory and we’ve got no benchmark from which to judge the difference between 75 and 100 basis points."

One factor which is likely to influence Bollard’s decision is how far the currency has fallen by Thursday, Toplis says.

Immediately after the last OCR cut on September 11, the New Zealand dollar was trading at 65.32 US cents. Late on Friday, it was trading at 61.70 US cents.

David Plank at Deutsche Bank says the Reserve Bank has made no attempt to convince the market that expecting a 100 point cut is too much and it has a history of going along with market expectations.

"The global economy’s in recession. That will be what drives it," Plank says, adding that Deutsche Bank is expecting a further 50 point cut to 6% in the OCR in December.

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