KEY POINTS:
The Reserve Bank looks set to bite the bullet and raise its official cash rate on Thursday in a bid to head off persistent inflation pressures.
Most market economists agree the bank will overcome its reluctance to tighten monetary conditions and opt for a 25 basis point rate rise in its cash rate to 7.5 per cent.
Economists said the bank's decision not to tighten at its last opportunity in January made the case for a hike this time more pressing, as there had been no evidence of the moderating trend in housing the bank had spoken of back then.
New Zealanders' love affair with real estate is helping drive inflation.
"There is a very high probability that they are going to increase the rate because they stated five weeks ago that unless they saw signs of weakness in the domestic economy and the housing market, they would be tightening," BNZ chief economist Tony Alexander said.
"These signs of weakness simply have not appeared."
Real estate, retail spending, consumer confidence and household debt numbers have all proven stronger since January, and Alexander said he did not expect the central bank to hold back on a rate hike because of market ructions brought on by China's volatile share market.
Alexander and others have criticised Reserve Bank governor Alan Bollard for not taking a tougher stance on monetary policy since 2004 and for failing to make household borrowers think more seriously before taking on extra debt.
ASB Bank said the Reserve Bank had been moving slowly into "hiking mode" but with some reluctance because of the likely implications for an already strong Kiwi dollar.
Ironically, inflation retreated to within the Reserve Bank's target 1-3 per cent range last year, but largely because of lower fuel prices as opposed to domestic factors.
Thursday's statement is expected to be focused beyond this year when inflation is no longer masked by the fall in petrol.
Deutsche Bank chief economist Darren Gibbs raised the possibility that the central bank may raise rates by as much as 50 basis points to remove all doubt about the bank's determination to contain inflation.
