A soft business confidence survey has increased the odds of a super-sized 50 basis point cut in the Official Cash Rate by the Reserve Bank on Wednesday.
The closely followed survey showed slowing demand, more staff cuts, and reduced investment and profit expectations.
Headline sentiment eased to a net 15% expecting better economic times from 26%, but fewer firms were optimistic about their own outlook, while it also showed strengthening inflation pressures with costs rising and businesses raising their prices in response.
NZIER principal economist Christina Leung said the weak growth outlook, but stronger inflation signals, highlighted the Reserve Bank's dilemma.
"It is a worrying development and it does highlight that very delicate balance that the Reserve Bank is facing in terms of supporting economic recovery but not wanting reignite inflation pressures."
She said NZIER was still forecasting a 25 basis point cut on Wednesday followed by another in late November, taking the official cash rate to a low 2.5%.
But Leung said NZIER survey might raise the odds of a bigger cut now.
"If the Reserve Bank had already been considering a 50 basis point cut then we see nothing to stop them going bigger."
25 or 50?
Leung said the survey pointed to inflation going through the top of the RBNZ's 1-3% target band, albeit temporarily.
Economists are divided on the size of the cut, with a Reuters poll narrowly favouring 25 basis points.
But financial market pricing puts a 45-45% chance of the bigger cut.
ASB senior economist Jane Turner said inflation numbers were bouncing around but the broader picture was of an economy "spinning its wheels in the mud".
"More support is needed, the RBNZ needs to get there faster and deliver a 50 basis point cut tomorrow or risk delivering the stimulus too late to matter to households and businesses."
She said that should be followed by a 25 basis point cut in November.
Westpac senior economist Michael Gordon said the weakness in the survey justified the bigger cut, and noted the RBNZ monetary policy committee had been split (voting 4 to 2 for a smaller cut) in August.
"This survey will support the RBNZ's view that the economy's recovery remains sluggish and will likely further encourage those on the committee who believed in August that a larger "circuit breaker" rate cut was appropriate."
For ANZ's Miles Workman the survey made Wednesday's decision a line ball call.
"All up, we still think strategy favours a dovish 25bp (basis point) cut tomorrow, but today's data move it towards the coin flip realm. A 50bp cut would not be difficult to justify."
And BNZ economists backed a cautious approach to setting rates in a muddied environment.
However, regardless of the size of the cut, several leading retail banks have moved to shave a few basis points off their mortgage rates in advance.
By Gyles Beckford for rnz.co.nz
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