KEY POINTS:
Reserve Bank watchers are unanimous that Governor Alan Bollard will keep the official cash rate on hold at 8.25 per cent on Thursday, as a slowing housing market and an uncertain global outlook offset concerns about persistent inflation.
Economic data since the September monetary policy statement have been mixed.
They have led some economists to conclude that the demand-led downturn the bank has been seeking to engineer is at last at hand.
But others see only a breather before a surge of dairy cash and vote-buying promises from politicians reignite domestic spending before the economy has time to rebuild some spare capacity.
Meanwhile the turmoil in global credit markets which overshadowed the September statement has yet to run its course, which all else being equal would keep the Reserve Bank in wait-and-see mode and interest rates on hold.
Food price inflation is running at an annual rate of 3.6 per cent and petrol prices have risen 9 per cent over the past three months alone.
"All the indications are inflation rates next year will have a 3 in front of them," ASB chief economist Nick Tuffley said.
"So the Reserve Bank has lost its headroom for the next 12 months. And inflation expectations have edged up."
With unemployment at 3.5 per cent the labour market remained tight and earlier signs that by some measures wage inflation had peaked had proven a false dawn, Tuffley said.
Westpac expects the peak in inflation in the September quarter next year to be around 3.9 per cent.
Higher prices at the petrol pump would leave people with less to spend on other things, a disinflationary effect, but would also cause a spike in the inflation rate in the near term.
While the Reserve Bank could ignore the direct price impacts of the increase, it would need to lean against the second round effects as businesses seek to recoup their increased transport costs, and employees seek compensation for the squeeze on their incomes.
"We are expecting a hawkish statement that foreshadows interest rate hikes next year, albeit conditionally," Westpac economist Dominick Stephens said.
"There is no way they will be able to achieve inflation under 3 per cent without further rate increases."
Hopes that dairy farmers would apply the coming jump in the Fonterra payout largely to debt reduction look increasingly forlorn.
"Retail sales in rural areas have gone ballistic before they even get the money," Stephens said. "While urban consumer spending has softened we expect that to go into reverse as the dairy payout flows through."
Bank of New Zealand head of research Stephen Toplis takes a less sanguine view of the outlook for consumer spending, which makes up more than 60 per cent of the economy.
In real terms retail sales contracted by 0.7 per cent in the June quarter, he points out, and recovered only a modest 0.2 per cent in the September quarter.
Even if it picks up to 0.4 per cent in the current quarter as the BNZ forecasts, it will still mean retail sales volumes by the end of the year are higher than they were in the March quarter.
Consumer spending has been hit by higher petrol and food prices crowding out spending on other things, the housing market is weaker and higher mortgage bills as fixed-rate loans are adjusted will have an effect.
Current mortgage rates are starting to look prohibitively high for first-home buyers and for those looking to buy investment properties, Toplis says.
The positive influences of wage growth, prospective tax cuts and huge earnings growth in the dairy sector would only just keep pace with the negatives.
ASB's Tuffley said one big reason for the Reserve Bank to sit tight was the outlook for the global economy and in particular the United States.
The ability of the American consumer to hold up in the face of adversity had been incredible over the years but would be sorely tested now.
PRICE PRESSURE
* 3.6 per cent annual rise in food prices.
* 9 per cent rise in petrol over past three months.
