Reserve Bank governor Graeme Wheeler delivered a warning to the financial markets yesterday - don't assume interest rates can only go up from here.
The markets had priced in a better-than-even chance he would raise the official cash rate from 2.5 per cent before the year is out.
Wheeler knocked that on the head: "There are both upside and downside risks to this outlook. At this point we expect to keep the OCR unchanged through the end of the year."
In fact the projected track for short-term interest rates in the monetary policy statement does not pencil in an OCR increase until the middle of next year.
Both the New Zealand dollar and wholesale interest rates fell on the news.
The kiwi fell to US81.74c at 5pm in Wellington from US82.60c immediately before the RBNZ release and US82.50c on Wednesday.
But the risks to that outlook, the bank emphasised, are "finely balanced".
On one side of the scales is the resurgent housing market and the risk that it will spill over into debt-fuelled consumption and inflation as in the mid-2000s boom.
It also poses the risk of a bust laying waste to household and bank balance sheets, since the starting point is levels of household debt, relative to incomes, that are very high by historical and international standards.
But on the other side of the scales are the dollar - overvalued by 10 to 15 per cent, Wheeler told MPs on the finance and expenditure select committee - and the emerging risk that the drought will worsen.
The statement's forecasts assume the dollar will stay around current levels for another year and then decline.
However, it spells out in some detail an alternative scenario in which the dollar stays high through 2014 and indicates that - all else being equal, and assuming that strength was not justified by economic fundamentals - the OCR would be cut by 50 basis points or even more.
That was not just jawboning, said Westpac chief economist Dominick Stephens.
"The scenario is highly relevant. Most people in the markets are bullish on the Kiwi dollar. It is highly likely the dollar will strengthen and the Reserve Bank is telling us how it would react to that." However, Stephens thinks the upside risk, that interest rate rises will start sooner than the Reserve Bank currently projects, is the more relevant one.
"I don't buy the idea that there could be 7 per cent plus house price inflation and a construction boom without any consumer response. I don't buy that at all.
"Consumers are already spending more and credit is growing faster than incomes."
On the potential impact of the drought, Wheeler said it would cut economic output by 0.2 to 0.3 per cent in the first half of this year, and if there was no substantial rain in the next month or two, the impact could climb to 1 per cent.
"The last thing we need, given we have an overvalued exchange rate and a drought that could deteriorate quite significantly - time will tell on that - is a housing bubble that gets out of control," Wheeler told the MPs.
"That's one of the reasons we have moved quite fast on these macro-prudential tools" - a reference to regulatory tools the bank is finalising, designed to boost the resilience of the banking system while, at the margin, slowing the housing market.
The bank now expects house price inflation to peak at 8.5 per cent some time in 2014. By one measure, the Real Estate Institute's stratified house price index, it is not far from that already.
Bank of New Zealand economist Craig Ebert said that with the signal of low interest rates for longer many would take the main message of yesterday's monetary policy statement as being "borrow money, buy houses".
Deutsche Bank chief economist Darren Gibbs is picking a gradual lift in the OCR will begin in about a year.By Brian Fallow Email Brian