The New Zealand dollar is significantly over-valued, it says.
Fiscal policy is turning contractionary. Drought blighted the summer. And the unemployment rate, while improving, is only barely below the average it has wobbled around since the recession.
All of those factors argue for keeping monetary policy easy.
On the other hand, economic growth has picked up, as Canterbury's massive rebuild gets going, and house prices are rising rapidly, especially in Auckland.
"In such circumstances the Reserve Bank would normally lift interest rates, lest inflation rear its ugly head in years to come," Westpac chief economist Dominick Stephens said.
"The most difficult aspect of the Reserve Bank's dilemma is that the longer interest rates stay low, the greater the probability of a boom-bust cycle in the housing market," Stephens said.
In a speech on May 30 Wheeler reflected on three key risks a rampant housing market poses.
One is that it spills over into consumer price inflation. When that happened in the mid-2000s boom, it took double-digit mortgage rates - and a lot of collateral damage to the tradables sector - to rein it in.
The second risk is to the financial system, if banks lack sufficient capital to cover a steep fall in house prices.
The third risk is the effect such a fall would have on the economy, which the experience of several Northern Hemisphere countries in recent years indicates would be grim.
ASB economist Christina Leung said Wheeler's speech indicated fairly clearly that the Reserve Bank was likely to use macro-prudential tools as a first line of defence against these risks and the tool of choice appeared to be to limit how much lending banks may do at high loan-to-value ratios.
"While such a move would somewhat increase the resilience of the banking system, it is unlikely to have a significant effect on the housing market," she said.
Previous Reserve Bank analysis suggested that using a tool such as LVR limits would have an impact on credit growth similar to raising the OCR by 25 basis points.
"Given the structural dynamics of the housing market - a supply shortage in Auckland that will take many years to redress - a minimal tightening in lending conditions is unlikely to have a significant impact while mortgage rates remain at a 50-year low.
"At most, macro-prudential tools will provide the Reserve Bank with some breathing room before having to resort to OCR hikes to slow down the potentially destabilising housing market," Leung said.
Stephens said the Reserve Bank had not yet made any commitment to restrict mortgage lending.
"And the fact is, nobody really knows what LVR speed limits will do to the housing market or the economy, because they have not been tried in recent decades in New Zealand," he said.
The bank would have to strike a delicate balance on this topic on Thursday, Stephens said.
"It must consider the possibility that LVR speed limits will be invoked in the future, without appearing to commit to their use."
