Indeed – our labour market will weaken, that is without doubt. But it still needs to weaken a fair way before our labour market is in neutral – let alone weak.

I feel that the labour market will weaken sufficiently now, and I can see the OCR falling further as a result – but stimulation from fiscal policy and a collapse in oil prices the OCR may not need to fall as much now.

I just can’t get past the fact that I am being hawkish with a 75bp cut!

Fair call. However, how stimulatory do we want monetary policy to be if we expect oil prices to remain low and fiscal policy to become more expansionary?

Note, I wouldn’t expect 5.75 to be the end of the cycle – the Bank would signal a much lower rate at some point in 2009. This is how the Bank can influence future rates now, even without committing to an immediate cut in banks opportunity cost of lending.

However, why would they risk cutting 150 basis points now when there is the chance that the significant decline in oil prices could reignite domestic spending activity. Uncertainty creates risks on both sides – and we face an uncertain environment at the moment.

“I hope you are right but I think that the asset price deflation we are seeing overseas – and in NZ – has further to run and will be more costly than your comments suggest”

Asset price deflation costly, huh? As long as there are buyers and sellers it doesn’t matter – the only issue appears when asset price deflation prevents lending that is in everyones interest. These sorts of credit rationing events do call for expansionary policy – but maybe not to the degree that other commentators are calling for.

For the Bank it is all about the demand curve – lower petrol prices increase demand, expansionary fiscal policy increases demand. Inflation still exists and the labour market is still tight. There is enough concern to prevent a 150bp cut methinks.

“Must admit, we are living in an interesting world where we are debating whether the rate cut will be 75bps or 150bps!”

Indeed – it is crazy.

Indeed – of course this only matters insofar at it influences our terms of trade, as you go on to mention.

Our terms of trade was at a historic high, as lower dairy prices and some pressure on meat and log prices feeds through it will fall further – even given the drop in oil prices. I agree, and as a result I agree that we need to move into easing territory.

However, a 75 basis point cut does take us into easing territory – especially if lending conditions continue to improve.

Looking at the previous RBNZ forecast we can see that they were already forecasting a sharp drop in our terms of trade in their initial forecasts – since then we have discovered that New Zealand has becoming significantly more credit constrained, another reason why the bank will want to cut rates.

However, since October 23 the outlook for the credit market hasn’t worsened – I can’t see that as a justification for a 150 basis point cut. Furthermore, if the RBNZ has a WORSE terms of trade story than they did in their September forecasts I probably wouldn’t believe it.

I think that other analysts are underplaying the importance of loosening fiscal policy and the drop in oil prices on the Reserve Banks rate decision – after all they cut rates in July, against economist expectations, as a result of rising fuel costs.

Note: I work for the one organisation that is picking 75 🙂

But …

We’ve known that the consent numbers would be this low for a couple of weeks now. The National Bank survey was bad – but not as bad as some people were expecting.

I realise that my pick of a 75bp cut is outside of the consensus, but I think other people are underestimating the size of the income boost that has already been provided by lower oil prices – they have done some of the loosening for the bank already!

Furthermore, the government wants to throw in 7bn to the economy – this reduces the required cut in interest rates.

Economists have moved from a consensus of 50bps of cuts to 150bps of cuts on virtually no new negative information (as expectations for consents, retail sales, and business confidence will have been consistent with the outcome) – that is what I find suspicious here.