Reserve Bank Governor Alan Bollard is taking a wait-and-see approach to the turmoil on global sharemarkets.
For the time being he regards inflation as the bigger danger.
The financial markets had not expected him to make a precautionary cut when he reviewed the official cash rate yesterday -and he didn't. It remains at 8.25 per cent, the highest in the developed world.
Dr Bollard acknowledged the turbulence in international markets and the worsening outlook for the US and European economies. "We will be watching these developments closely, particularly their implications for the Asian and Australian economies and for world commodity prices," he said.
But even with the housing market cooling, the Reserve Bank needs to lean against inflation, which it expects to remain above 3 per cent all this year. Market economists said it was the right call.
"If you react to downside risks to growth at this point and those risks don't eventuate then you are going to have a horrible inflation picture facing you over the next couple of years," Deutsche Bank chief economist Darren Gibbs said. "It's pretty horrible already."
The markets don't expect Dr Bollard to cut interest rates until late this year. His comments yesterday were seen as implicitly endorsing that view.
It could be brought forward if the international environment worsened. But then some relief would be likely from a lower dollar and possibly tax cuts.
Meanwhile, mortgage rates have risen since the Reserve Bank's previous interest rate decision in December, without it having to do anything. The risk premium built into interest rates worldwide has risen, pushing up the cost of funds to New Zealand banks.
The Reserve Bank had time on its side, Mr Gibbs said. "The economy is in good enough shape, with the money that is coming into the rural sector this year."
And the unemployment rate was only 3.5 per cent, he said.
"If we suddenly find ourselves with 4.5 per cent [unemployment] in nine months, some people would say that is not a disaster. There would be a lot of employers who could find labour they currently can't find."
