Another rise in the official cash rate, to 3 per cent, on Thursday is seen as a virtual certainty. But the markets will scrutinise the accompanying statement for signs that the fact that dairy prices and the exchange rate have parted company is giving the Reserve Bank second thoughts about the pace and ultimate extent of the monetary tightening still to come.
Money market pricing implies a 97 per cent chance the bank will raise its policy rate 25 basis points this week and then either three or four more times by this time next year.
And a Reuters poll of 17 economic forecasters found near-universal expectation of another hike in June and a majority expecting two more by the end of the year.
Westpac chief economist Dominick Stephens said the message would probably be the same as in March: The economy is gathering momentum, construction is booming, inflation pressures are building and therefore the OCR needs to rise.
The Reserve Bank in its communications earlier this year had made it crystal clear it expects to increase the OCR by about 2 percentage points over two years and the 90-day interest rate forecast in the March monetary policy statement seemed to indicate it was planning four OCR hikes in a row, in March, April, June and July, he said.
But such projections always depend on the economy evolving in line with its expectations. "The balance of developments over the past few weeks has pointed in the direction of less inflation pressure," he said.
On a trade-weighted basis the kiwi dollar has traded between 2 and 3 per cent higher than the Reserve Bank assumed, at the same time as dairy prices have dropped sharply - by 20 per cent since early February.
"If export prices had gone up instead of down and the exchange rate was higher the Reserve Bank would say the shock here is that export prices have gone up, and the exchange rate has just responded to that and taken a lot of the inflation pressure out," Stephens said.
"But that is not what has happened here. There is a completely separate exchange rate shock and it must require a lower forecast for the future OCR - fewer OCR hikes."
But probably only one fewer over the next two years, a cumulative 1.75 instead of 2 percentage points, Stephens said.
ASB chief economist Nick Tuffley said the New Zealand dollar had not been performing its buffer function of falling to offset weaker export prices.
"It is entirely possible and appropriate that the New Zealand dollar does fall and catch up to this particular fundamental," he said.
But the Reserve Bank also faced the uncomfortable reality that it was going it alone among the developed world in lifting interest rates, and that made New Zealand stand out for global investors, resulting in a risk that the dollar is stronger for longer.
"That risk may start to colour the bank's OCR decisions beyond April," Tuffley said.