Westpac Research notes:



Before today we were forecasting 25bp OCR reductions in July and September. On top of the June cut that has already occurred, our forecast implied a total of three OCR cuts in 2015, and a terminal OCR of 2.75%. In our commentary we noted there was a risk of a fourth OCR cut this year.



Over the past week emerging news has shifted that fourth cut from a risk scenario to a likelihood. Accordingly, we are now forecasting 25bp OCR reductions in July, September and October. This will take the OCR to a low of 2.5% this year.Commensurate with our lower OCR forecast, we are now forecasting an average NZD/USD exchange rate of 62 cents in the December quarter of 2015.



The key reasons for our change of OCR forecast are:



A marked deterioration in NZ economic sentiment, evidenced by our Consumer Confidence, Regional Economic Confidence and Employment Confidence surveys, as well as ANZ's Business Outlook survey. We've also detected a distinct souring of business confidence in our visits to businesses and regions around the country.





This week's sharp reduction in global dairy prices. The RBNZ is currently acutely focussed on dairy prices.





The sharp sell-off in Chinese equity prices. We are not convinced that Chinese equity prices are a good reflection of the Chinese economy's trajectory. However, financial market volatility is important for confidence. Lower confidence could impact commodity prices and New Zealand businesses' investment and employment decisions.





Heightened tensions in Greece, which may also affect confidence.

Of course, there have also been recent developments that lean against OCR cuts. These include the plunging exchange rate, which will provoke inflation, and the housing market. Emerging data suggests that the combination of proposed tax changes, new LVR rules, and lower mortgage rates has been positive for house prices on balance - the Auckland market in particular continues to power ahead.All of these developments must be considered in the context of a central bank that is under pressure to lift inflation towards 2%, is wary of further downside surprises to inflation, and is sounding rather dismissive of the inflation risks posed by rising house prices. It is this context that leads us to comfortably conclude that a 2.5% OCR by year-end is the best forecast at present.At the July OCR Review we expect the RBNZ to cut the OCR by 25 basis points and explicitly signal further OCR reductions, perhaps by repeating the phrase "We expect further easing may be appropriate."