The Reserve Bank is still of a mind to raise interest rates but later, more slowly and to a lower peak than it previously foreshadowed and subject to there being only a mild recession in Europe.
"We are holding rates and that's our short-term view," Governor Alan Bollard said yesterday.
"The 90-day track we have published is consistent with some gentle rises some time in the middle of next year."
The wholesale interest rate track in the December monetary policy statement has pencilled in three 25-point rate rises from the middle of next year but financial market pricing implies no increases until well into next year.
And economists at the main local banks expect the official cash rate to remain on hold at 2.5 per cent until September or December next year.
"The Governor said he thought the OCR will move in mid-2012. That qualifies you as a hawk in this environment," Westpac chief economist Dominick Stephens said.
The statement sketches an alternative scenario which in effect asked how bad the world economy would have to get, under the bank's modelling, to justify the flat outlook for interest rates the markets are currently pricing in.
It would require New Zealand's trading partners to suffer a recession at least two-thirds as bad as in 2008 and to recover more slowly from it.
"This is a much more severe downturn than the Reserve Bank, or we, currently envision," Deutsche Bank chief economist Darren Gibbs said.
Even that scenario assumes that the international markets that New Zealand banks rely on for a substantial minority of their funding, continue to function and do not seize up as in 2008.
"If it were to go to market dysfunction, then all those sorts of bets are off," Bollard said.
At present the banks are able to roll over short-term overseas funding and are relatively liquid, face little growth in the demand for credit and are enjoying strong growth in deposits.
But the Reserve Bank expects banks' funding costs to rise over the coming year - by about 30 basis points - and that this will put upward pressure on retail interest rates relative to the official cash rate.
Monetary policy would have to take account of such pressure, the statement said. But when Bollard was asked if he would cut the OCR in the event the banks were going to pass on those increased funding costs, he said no.
The bank has revised down its growth forecasts but it still has growth picking up gradually from a pace of about 0.6 per cent a quarter now to 0.8 per cent by the end of next year as the rebuilding of Christchurch gets under way in earnest.
It has revised lower its outlook for residential construction outside of Canterbury, however.
Both households and businesses are expected to remain cautious with business investment remaining weak next year and household consumption subdued, reflecting house prices which are, in real terms, flat.
Fiscal policy turns contractionary and the strong improvement in the terms of trade is expected to be partially unwound, though the bank expects export prices to remain relatively high by historical standards.
ASB economist Christina Leung said recent easing in key inflation indicators, including inflation expectations and businesses' pricing intentions, had made the Reserve Bank more comfortable about underlying inflation pressures.
The strength of the New Zealand dollar over the middle of this year would put downward pressure on the price of imported goods and keep inflation low early next year, she said.
"However beyond this we expect the pick-up in post-earthquake rebuilding activity from mid-2012 will underpin an increase in inflation over the medium term."
ANZ chief economist Cameron Bagrie said that all up, the statement was consistent with his view that the OCR was on hold for an extended period.
"We have pencilled in December 2012 for the start of policy normalisation but the spirit is what matters: rates are on hold for a long time. There is nothing the Reserve Bank can do about the global situation but watch, worry and wait."
TAKING A HIKE
* The interest rate track in the Reserve Bank's monetary policy statement has pencilled in three 25-point rate rises from the middle of next year.
* Financial market pricing implies no increase until well into next year.
* Bank economists expect rate to be held at 2.5 per cent until September or December.