Bank expected to be wary of stoking housing market when reviewing the economy's key interest rate on Thursday.
Economists do not expect the Reserve Bank to signal any material change in its "on hold" stance when it reviews the official cash rate on Thursday as a resurgent housing market offsets a higher dollar, and weaker inflation, than it expected.
Financial markets see almost no chance this week of a change from the all-time low of 2.5 per cent and only a one-in-five chance of a rate hike by this time next year.
Economic forecasters are divided between next December and March 2014 over the timing of the first interest rate rise.
The Reserve Bank's own forecasts last month had the output gap remaining negative, and interest rates on hold, until early next year.
It said it was mindful that unemployment had proven higher and inflation weaker than it expected.
But it immediately added that, with the reconstruction of Christchurch now clearly under way, it would be watching for more inflation pressure than it already forecast.
"The Reserve Bank did acknowledge the economy was currently weak and inflation low, but it emphasised that monetary policy is about anticipating future inflation," Westpac chief economist Dominick Stephens said.
It expected the post-quake reconstruction boom and buoyant housing market to boost domestic demand and cause inflation to rise gradually towards the 2 per cent target.
"Fiscal austerity and the high exchange rate would provide only partial offsets, and the global outlook was seen as uncertain, but less threatening than earlier in the year."
Since then the exchange rate has been about 2 per cent higher than the Reserve Bank assumed, and December quarter inflation was 0.3 percentage points weaker than it forecast.
Last week the International Monetary Fund cut its forecast for growth in world trade this year from 4.5 to 3.8 per cent - although that would still be an improvement on last year.
Stephens said the New Zealand dollar might go higher still over coming months, and the Reserve Bank might fear as much.
But he expects the bank to be wary of giving any hint that the next change in the OCR could be down, for fear of stoking the overheating housing market.
The new policy targets agreement between governor Graeme Wheeler and the Government requires the bank to monitor house prices and have regard to financial stability when setting monetary policy.
ASB economist Jane Turner said that recent indicators suggested economic activity picked up towards the end of last year, citing in particular businesses' reported activity in the NZIER quarterly survey of business opinion and electronic card transactions pointing to a rise in retail spending.
But one area the Reserve Bank might start to become increasingly wary of is the acceleration in household credit growth, she said, given that New Zealand's debt relative to the size of the economy remains relatively high.By Brian Fallow Email Brian