With just four more business days until the next OCR decision, we look at what the wholesale money markets are signaling

Wholesale interest rate changes are still moving fast, even if the direction is the same - down.

This is an update, four working days ahead of the upcoming Official Cash Rate (OCR) review from the Reserve Bank next Wednesday, October 9.

Wholesale money markets are now pricing in 45 basis points of a cut then.

And another almost 50 basis points at the November 27 OCR review and full Monetary Policy Statement.

Without these cut levels delivered, there are likely to be substantial financial market reactions for the required reassessments.

With them delivered, the current 5.25% OCR could be 4.25% by Christmas.

But there is more to financial markets than changes to the overnight indexed swap (OIS) implied rates.

The 90 day bank bill rate, which 'usually' runs at a premium to the OCR, has now turned sharply negative.

That difference today is 44 basis points.

The story is largely the same if we add the one-year swap rate to the analysis, the one swap rate that is influenced by OCR expectations.

But this shows an even fiercer retreat.

Banks as receivers are finding payers willing to offer sharply lower rates in these swap markets, and that underpins their ability to fund lower retail mortgage rates. (More on the theory and practice here.)

Over the past year, the one year swap premium to the OCR has shifted from about 75 basis points, to 25 basis points, then to 0 basis points, and now to suddenly minus 125 basis points.

The Reserve Bank's Monetary Policy Committee will make its decisions based on the economic data they see for the New Zealand economy, and their judgements about the next few years, especially about inflation prospects.

The question is; will that committee read these tea-leaves the same way financial markets have interpreted them?

If they do see a similar picture, these variations will close up as the OCR falls.

If they don't, the wholesale money markets will have to recalibrate, and that could be messy. A recalibration may also involve the exchange rate.

Only the Monetary Policy Committee 'knows' what the decision will be, although to be fair they probably haven't yet started the key parts of making that decision yet.

Everyone else - traders, money market participants, bank treasurers, bank bosses, economists, you and me - we are only guessing (ie betting). And important stuff can emerge between now and Wednesday that could affect the OCR call.

'Certainties' now could be dangerous. If your current guess works out, your confirmation bias could be doubly dangerous for the November decision. Just saying ...