Another humungous rate cut expected

It used to be that a 50 basis point OCR cut, as Reserve Bank governor Alan Bollard implemented in September, was regarded as a huge move but Bollard followed September’s cut with a 100 point cut in October and a 150 point cut in December, taking the OCR to 5%.

As of Friday, 13 of 15 economists were expecting a 100 basis point cut to 4% this time around but two, Maquarie’s and Westpac chief economist Brendan O’Donovan were calling for a 150 point cut.

Tellingly, wholesale market pricing was moving towards a 150 point cut. O’Donovan says the market has been pretty illiquid but was pricing in 115 basis points by late Friday.

O’Donovan says the data flow since the central bank’s last move has shown a much weaker economy. "The deterioration in the data has been more dramatic than between October and December. We think the changes in data are worth about 170 basis points in terms of the Reserve Bank’s model – 150 is certainly justifiable," he says.