Hot on the heels of low inflation data and another plunge in dairy prices, Westpac chief economist Dominick Stephens is now forecasting the official cash rate to fall to a new low of 2% by the end of the year.
The OCR was reduced by the Reserve Bank at its last meeting to 3.25% from a long time high of 3.5%.
However, at last week's GlobalDairyTrade auction, dairy prices fell 10.7% and Westpac revised its milk payment to farmers to $4.30 per kilogram of milksolids, down from $4.40 previously and well below Fonterra's early forecast of $5.25.
A few hours later, inflation figures were, once again, softer than expected.
Westpac later published a bulletin arguing the Canterbury rebuild had peaked nine months earlier than previously expected.
''This means the rebuild will not add materially to economic growth over the remainder of 2015 or in 2016 and will detract materially from growth starting in 2017.
''These are all very material developments and they suggest the Reserve Bank has a great deal of extra work to do in order to return inflation to 2% on a sustained basis.''
The reduction to 2% would involve one cut of 0.5%, most likely in September but possibly as early as Thursday, Mr Stephens said.
He also expected a 0.25% cut in the other three opportunities during the year.
While acknowledging a 0.5% reduction could come as early as July, Westpac felt it was more likely the Reserve Bank would cut the OCR by 0.25% on Thursday and by 0.5% in September.
The strong state of the housing market might be a factor preventing a 0.5% reduction in July, Mr Stephens said.
The faltering economy was likely to have dented the housing market by September. Also, Thursday's release was only a one page OCR review while September was a full Monetary Policy Statement.
Markets were still capable of tipping the balance. If interest rate markets moved decisively towards pricing in a 0.5% cut on Thursday, the Reserve Bank might feel it had to deliver, he said.
HSBC Australia and New Zealand chief economist Paul Bloxham observed what a difference a year made.
Twelve months ago, the Reserve Bank was just completing a 1% tightening in the expectation strong growth would generate greater inflationary pressures, Mr Bloxham said.
The growth story panned out largely as expected, but inflation, rather than heading higher, had weakened.
''Although we still expect New Zealand's economy to perform well over 2015, the peak of the growth cycle is clearly past. Confidence and activity indicators have generally turned lower over recent months.''
A big reason for that was the persistent weakness in dairy prices. Worryingly, the past two auctions had resulted in a 16% drop in the GDT price index, he said.
Over the medium term, Mr Bloxham expected dairy prices to strengthen but warned there was a risk the recovery would come too late for some farmers.
For the Reserve Bank, upside risks had been taken off the table. Action was needed to support the dairy sector in the short term and, in the medium term, to ensure inflation stabilised close to 2%.
HSBC was expecting a cut of 0.25% in the OCR this week, but a cut of 0.5% was a possibility. Mr Bloxham expected the OCR to be 2.5% by the end of the year.
Grant Thornton business partner Paul Kane questioned why there was so much attention on gloom and doom when there was much to be happy about.
If the same optimism questions being asked now were being asked in 2010 11, New Zealand business confidence would appear to be soaring.
New Zealand was tracking at just below 3% growth which, historically, was ''very solid''. There was no denying dairy was weighing down the economy but New Zealand macro conditions were strong.
''We have a falling dollar, which will help improve the dairy situation and provide a substantial boost to our export market, including tourism.
''There's falling interest rates, low inflation, a government set of accounts on the verge of being in surplus, falling unemployment and strong migration.''
In the much maligned manufacturing sector, niche players were starting to get market traction, Mr Kane said.
As rising wages and conditions in China placed more pressure on margins, requiring plants to seek larger minimum runs, smaller manufacturers in New Zealand were starting to win market share.
Dairying had annual exports of more than $13.7 billion and employed 37,700 people. But tourism accounted for $10.3 billion, or 15.3% of New Zealand total exports, while supporting 94,000 full time equivalent jobs, he said.
Tourism was supported by its geographical spread. And while there were well founded concerns New Zealand's economy was being driven by Auckland and Christchurch, the fact the tourist dollar was spent throughout the country underpinned its importance.
Recently, Queenstown had 22 transtasman flights in a day.
''So instead of lamenting dairy's cyclical low, why not celebrate and make headlines out of tourism's growth and opportunities?''
At a glance
• OCR expected to be cut on Thursday.
• New OCR low of 2% possible by December.
• Dairy prices and low inflation reasons for cuts.
• Tourism is a positive in a sea of gloom.
