KEY POINTS:
The Reserve Bank left its official cash rate on hold at 8.25 per cent yesterday as nervousness about the international outlook balanced concern about "intense" domestic inflation pressures.
It was the right call in these volatile times, market economists said.
But they noted that the bank's economic forecasts,
which do not include any impact from the turmoil in global credit markets, show inflation hitting 3 per cent by the end of this year and staying there or thereabouts until the second half of 2009.
And those forecasts rely on the dollar and interest rates remaining at their current, historically high levels for another two or three years.
The Reserve Bank's forecasts also include a potential or sustainable growth rate of just under 3 per cent, which would imply a marked improvement in productivity from what we have seen lately.
"The numbers are extremely hawkish. If it was any other time we would be talking about further interest rate hikes," said Westpac chief economist Brendan O'Donovan.
The Reserve Bank sees a spike in national income next year on the back of surging commodity prices, especially for dairy products. But it says the effects of stronger export revenues on activity and inflation will be broadly offset by the braking effect of the four rate increases it delivered this year.
In particular it sees the housing market as cooling.
"I know we have forecast that before," Governor Alan Bollard told Parliament's finance select committee, "but this time it is."
Almost 30 per cent of mortgage debt at fixed rates, representing about a quarter of all mortgage debt, will come up for an interest rate reset over the next 12 months. If current mortgage rates stick, these borrowers will face increases of at least a full percentage point in their mortgage rates.
That would leave less money for discretionary spending.
But an "exceptionally tight" labour market will see wages continuing to grow at historically high rates.
The bank expects the shakeout in the finance companies sector to have a limited impact on the broader economy.
"The only part of the economy we see slowing down [as a result] is some parts of the property development sector," Bollard said.
Internationally, the picture is one of extreme uncertainty. The longer the risk aversion evident in financial markets continues and the more severe the impact on the US economy, the more likely it is that growth in other economies will suffer, it says. But it says there is a lot of debate about how much a US slowdown will affect Asia.
"Furthermore history tells us that a global slowdown does not always result in a significant deterioration in the New Zealand economy."
O'Donovan said there was a good case for New Zealand being one of the economies that "decoupled" from the United States. A lot of the rise in export commodity prices had been because of supply rather than demand factors, which would not unwind quickly.
And if the world economy did weaken markedly the New Zealand dollar was likely to fall, giving exporters an even bigger income boost.
Money market pricing has the Reserve Bank starting to cut interest rates in six months but the bank's own interest rate projections keep 90-day rates above 8 per cent until late 2009.
A Reuters poll yesterday found only three of the 15 forecasters surveyed expect the bank to have cut the OCR by the middle of next year.
"New Zealand has a marked inflation problem and it is only the international uncertainty that is buying them [the RB] time," O'Donovan said.
"The only thing that would justify rate cuts in the next year would be if the housing market slowed much more dramatically than the bank is anticipating."
Reserve Bank forecasts
* Inflation hovers around 3 per cent until late 2009.
* Growth averages 2.9 per cent over the next three years.
* Unemployment creeps up to 4.4 per cent by 2010.
