Market watchers expect the Reserve Bank to leave the official cash rate on hold at 2.5 per cent when it reviews it on Thursday, but they will pore over what the bank says for clues about whether it is giving more weight to a warmer than expected New Zealand economy or a colder global one.
The June monetary policy statement signalled the bank's intention to start raising rates in December and pencilled in 2 percentage points of increases by the end of next year.
But over the past month the markets have flipped from scepticism that a December start to the tightening cycle was warranted, to pricing in a high likelihood of a first hike in October, with a fair chance in September.
Economists are a bit more doubtful.
A Bloomberg survey of 15 forecasters found two, including the BNZ, calling a September start, five calling October and 11 by December.
"We expect the Reserve Bank's statement will broadly reaffirm the December start date for hikes," said Westpac chief economist Dominick Stephens. "Markets are responding to news of stronger growth and inflation, but there are equally important offsets in the sharp rise in the New Zealand dollar and signs of slower growth among our trading partners."
Gross domestic product in the March quarter grew 0.8 per cent, despite the Christchurch earthquake in the middle of it, when the Reserve Bank had forecast 0.3 per cent.
In addition, growth in the December quarter was revised up sharply from 0.2 to 0.5 per cent.
Together these numbers imply significantly more momentum in the economy at the start of the year than previously thought and, together with survey evidence of robust business confidence and improved consumer confidence, call into question the need to continue the "insurance" cut to the official cash rate the bank made in the aftermath of the February earthquake.
"There is simply no justification for the Reserve Bank to keep its emergency rate cut," BNZ head of research Stephen Toplis said, "and for consistency's sake it must be removed as soon as possible."
June quarter inflation was also stronger than expected at 1 per cent, making 5.3 per cent for the year compared with the Reserve Bank's forecast of 5 per cent.
But while the domestic outlook has brightened, the international outlook has darkened - a combination that has seen the NZ dollar rise sharply.
Since the June statement it has appreciated nearly 5 per cent against the US dollar, 3 per cent against the Australian and 4.5 per cent on the trade-weighed index. The TWI is now 7.5 per cent higher than the average level for the current quarter assumed in the bank's June forecasts.
Depending on how long it persists, a higher currency means weaker growth and less inflation pressure later on.
Consensus forecasts for trading-partner growth had begun to be revised down, Deutsche Bank chief economist Darren Gibbs said.
Australian growth had slowed sharply and the outcome of the European sovereign debt crisis and the US debt-ceiling crisis would be fiscal contraction on both sides of the Atlantic.
Export commodity prices had generally moved lower over the past month or so, Gibbs said.
It seemed more likely the pace of reconstruction in Christchurch next year would disappoint expectations rather than exceed them, he said.
Gibbs sees little point in an earlier start to raising the official cash rate, when credit growth remains extremely subdued, at just 1 per cent in the year ended May, "unless the Reserve Bank seeks further strength in the exchange rate, which we doubt".By Brian Fallow Email Brian