Despite souring economic data at home and abroad, the Reserve Bank will not lower the official cash rate below 2.5 per cent next week, predicts Westpac chief economist Dominick Stephens.
Reserve Bank of New Zealand Governor Alan Bollard "must have endured grim reading" in his review of the economic situation ahead of next week's OCR decision and Monetary Policy Statement, Stephens said.
The European sovereign debt crisis is at a new level of danger, the price of Kiwi export commodities has slumped, and the domestic economy is recovering only slowly. Only the domestic housing market shows some hope, he said.
"This might, at first glance, seem like the sort of environment in which the Reserve Bank will reduce the OCR.
"We argue that it will not, for two very compelling reasons - monetary conditions have already eased, and the uncertain environment argues for maintaining flexibility."
Stephens' predictions were echoed by ASB economists, who said the weaker economic outlook had been partly offset by looser monetary conditions via the weaker dollar and declines in fixed interest rates.
Since the April OCR review, the exchange rate has fallen almost 5 per cent on a trade weighted basis.
ASB said it expected the Reserve Bank to push out the timing of OCR increases to the first half of 2013.
Stephens predicted the Reserve Bank to adopt a "wait-and-see approach" because of uncertainly around the international situation, particularly in Europe.
Bollard will hold the OCR but emphasise the RBNZ's ability to reduce it if global financial conditions worsen, he said.
"The point is, the RBNZ will not know which scenario we are heading into when it issues its Monetary Policy Statement on the 14th.
"So the best strategic option at that point is to leave the OCR on hold."
An accompanying Reserve Bank statement may repeat key themes on the domestic economy, including that of low inflation and signs of slow economic recovery, Stephens said.
"Commentary on global economic and financial conditions will be much more negative.
"We expect the Reserve Bank will make special mention of the sharp fall in global prices for New Zealand export commodities."
ASB economists said if Europe continued to "muddle through" its financial crisis in current fashion, a cut to the OCR would be unlikely.
"However, should a more significant disruption eventuate (such as a Greek exit from the euro) an OCR cut would be very likely. We currently put the odds of this at one in three," ASB said.
Stephens expected the Reserve Bank's forecasts will probably predict no change in 90-day interest rates for the next year or so. The Reserve Bank may forecast "gently rising interest rates" for 2014.