The Reserve Bank will decide how much to cut interest rates tomorrow.
The market is currently expecting between a 50bp and a 75bp cut. However, there is still potential for a 100bp cut if the Bank downgrades their growth forecast sufficiently.
Ultimately, it will all be about the Bank’s forecast growth. In normal circumstances we might say that an OCR of 6% to 6.5% is neutral – however, we are expecting a period of sub-trend growth, a faltering credit market, and downward pressure on prices from overseas. In such an environment neutral could be substantially lower.
If the Bank now expects low growth to be substantially more persistent then I would expect a larger cut. Forget about “keeping bullets in the barrel” the Bank will want to get us sufficiently under neutral as soon as possible. If the Bank still expects a bounce back in growth (even following a sharp fall), then given the lags associated with monetary policy I would expect a relatively short cut.
As a result, in my opinion tomorrow’s decision will rest on the Bank’s “mediumish” term outlook (2-5 years). We will see I guess 😛