Reserve Bank surprises markets with 1% OCR

Economists predicted the Reserve Bank would cut the OCR by 25 basis points in the face of slow economic growth and global concerns. But the central bank's Monetary Policy Committee has stunned markets by making its biggest cut since March 2011.

ASB economist Nick Tuffley said the RBNZ has decided to "front foot" and take more drastic action now.

"It's a surprise and we are really seeing the Reserve Bank catch up with market pricing below 1%. The key question is: where do they go from here? At this stage we think there will be another cut to 0.75%."

The Reserve Bank has forecast the OCR could dip below 1% next year. 

Tuffley expects the significant cut to have an impact on short-term lending rates.

"They are delivering their stimulus now, rather than waiting. I'd expect short-term lending rates to come down," Tuffley said.

Independent economist Michael Reddell welcomed the cut as "good, and courageous". He added: "There was no hint in advance of the first move in excess of 25 bps since 2008/09, and that is a poor reflection on the Bank's communications between statements."

Kiwibank economist Jarrod Kerr admitted his "surprise" the bank made cuts of 50 basis points.

"They've done what we thought they might take a couple of meetings to do," Kerr said. "Rates have rallied lower across the curve, doing some heavy lifting for the Reserve Bank."

Kerr predicts rates will drop further.

"If things get worse they could deliver another cut in the next meeting, if not it will be a 2020 story. The main message here is rates will be lower for much longer and there's a good chance interest rates will continue to fall over the next 6-12 months."