The financial markets see no chance the Reserve Bank will raise the official cash rate on Thursday, so their focus will be on how the accompanying monetary policy statement describes the balance of risks going forward.
Since the December statement the New Zealand dollar has risen 4 per cent on a trade-weighted basis, and the export outlook is further clouded by a lack of rain clouds on the literal horizon. On the other hand the housing market has already blown away the bank's sanguine projections of three months ago.
Then it thought house price inflation nationwide would peak at a bit over 5 per cent later this year, constrained by high household debt and a construction boom. But annual house price inflation is already 6.3 per cent according to Quotable Value and 7.2 per cent according to the Real Estate Institute, propelled by double-digit increases in Auckland.
By the time of the January OCR review the bank's language on housing had become stern. Westpac chief economist Dominick Stephens expects Thursday's statement to contain similar warnings that if house prices continue to rise too rapidly the OCR will need to rise earlier than previously forecast.
The December statement indicated the bank expected to start raising the OCR in the March quarter next year.
The latest Reuters' poll shows economists split down the middle on whether it will be the December 2013 or March 2014 quarter. Money market pricing implies a better than two-thirds chance it will be December.
In any case improving sentiment about the global economy has lowered banks' funding costs and mortgage rates.
The fact that it is only a matter of time before the bank needs to tighten, rules out a cut to the OCR to relieve pressure on the exchange rate.
Governor Graeme Wheeler argued in a February 20 speech that there was no reliable mechanical relationship between interest rate cuts and the exchange rate, and that any such move would be ineffectual if the markets viewed it as only temporary.
What the high dollar does do, however, is hold down the cost of imported goods, contributing to a benign outlook for consumer price inflation and allowing the Reserve Bank to keep the OCR low for longer.
ASB economist Jane Turner said other developments, such as the emerging drought and the weakness in the labour market, argued for leaving interest rates on hold for longer.
But most of the domestic economic data over the past month or two pointed to ongoing improvement, she said.
"Business confidence and retail trade lifted over late 2012 and appear to be continuing that trend over early 2013. Rebuilding activity in Canterbury also continues to gather pace, with strong increases in building consents in the region."
Deutsche Bank chief economist Darren Gibbs said that by itself economic growth did not require a tightening of monetary policy if the growth did not lead to a reduction in spare capacity and an increase in inflation pressures.
"With the unemployment rate at 6.9 per cent the Reserve Bank will continue to view the economy as having material spare capacity."
Thursday's statement will also be scrutinised for clues as to whether the bank is of a mind to reach for tools available to it as the banks' regulator.
"The market will be trying to further gauge the Reserve Bank's willingness to deploy macro-prudential instruments in advance of an increase in the OCR if house price inflation and/or credit growth accelerates significantly whilst general inflation pressures remain benign," Gibbs said.
A strong signal was probably unlikely, he thought. But it would probably weaken investors' expectations of an OCR hike this year and at the margin might undermine the exchange rate, he said.
