KEY POINTS:
The Reserve Bank is expected to keep its official cash rate at 8.25 per cent on Thursday to try to head off inflation, which is widely forecast to reach the upper end of its annual 1 to 3 per cent target range by the end of this year.
Economists expect the bank to "look through" recent data, which shows annual inflation falling to 1.8 per cent in the September year.
But the September quarter consumers price index, which showed a 0.5 per cent rise against expectations of 0.8 per cent, will go some way towards lowering inflation expectations, they say.
Most market economists do not expect to see a rate change in the near future, but a minority say there may be more rate hikes in store for next year.
ASB Bank chief economist Nick Tuffley expects the Reserve Bank to take a "dollar-each-way approach" - one that recognises that while there are domestic inflationary pressures, there are also uncertainties on the international scene.
"There are still some pretty strong inflation pressures and they are not really dying away in a big hurry," he says.
The true annual inflation picture has been masked somewhat by the low December 2006 quarter, which showed a 0.2 per cent fall in the CPI thanks to a drop in oil prices over that quarter.
Uncertainty surrounding an expected slowdown in the US housing market and concerns about global credit markets are likely to feature in the Reserve Bank's thinking.
Bank of New Zealand chief economist Tony Alexander says that the Reserve Bank will be happy with the status quo for the time being.
"They are still going to acknowledge that there is an inflationary risk, but for now they are happy and will wait to see how things pan out," he says.
"We think the chances of another hike are fairly low and that they will probably start cutting late next year," he says.
Alexander says the bank will be wary of making people feel optimistic that it will not raise rates in future. "They did that in 2004 and again in 2006 and were wrong, so they will be very cautious about signalling the end of the tightening cycle as such."
But Westpac Institutional Bank economists say in a commentary that by next year, with inflation sitting just outside the target band and looking buoyant, it will be clear tighter monetary conditions will be required.
"We anticipate two further hikes in the first half of 2008, although the timing depends on the behaviour of the New Zealand dollar," Westpac says.
