Reserve Bank Governor Alan Bollard managed to surprise the markets yesterday after all.

Not with his decision to keep the official cash rate on hold at 3 per cent. That was a done deal even before the Canterbury earthquake.

But the extent of the downward revisions to the Reserve Bank's forecasts for economic growth, and the outlook for interest rates, raised a lot of eyebrows among market economists.

"Things are tough. Things are scratchy," said ANZ National Bank chief economist Cameron Bagrie.

"But I'm not convinced this economy is going to grow at 2.5 per cent [a year] for the next three years. That's a little bit too downbeat."

He remains of the view that next year will see 4 per cent growth.

Westpac economist Dominick Stephens said the flow of economic data since the bank's June statement had been weaker, but not nearly to the extent that would justify the Reserve Bank's change of view.

In June the bank forecast 90-day wholesale interest rates (those most influenced by the OCR) would rise to 6.1 per cent by March 2013. Now it sees them at 4.7 per cent by then, a drop of 140 basis points.

Stephens contrasts that with the December 2008 statement, when the collapse of Lehman Brothers and a sharp drop in world trade led to fears of another Great Depression.

"It was a terrifying situation and the bank cut its interest outlook [over the forecast period] by 210 basis points. I don't think the news over the past three months has been two-thirds as bad as it was then," he said.

Appearing before Parliament's finance and expenditure select committee yesterday Bollard was asked what was inhibiting the recovery.

"Households and businesses are less confident about the speed of the recovery and seem to have the view they need to reduce debt more than we thought in June," he said.

Globally the picture was one of "a slow and long recovery out of a deep and long recession. Governments are being quite cautious about what to do about that and are being told by the markets that there's not a lot of ammunition left."

But in New Zealand it was much more an issue of confidence, he said.

The bank did not have time to revise its detailed forecasts to take account of the impact of the earthquake, which it thinks will add between 0.5 and 1 per cent to GDP over the next 18 months. The forecasts might therefore be seen as the bank's view of the other 85 per cent of the country.

It has slashed its expectations for growth in private consumption, residential construction and business investment next year.

Clearly frustrated at extreme volatility in the official statistics on the labour market, the bank has had to adjust for a weaker starting point in employment and unemployment.

But the main driver of its darker view of the outlook for consumer spending is the housing market. It notes that house prices have not reflected the weakness of turnover in the housing market as much as the historical relationship would suggest.

And the decline in net immigration over the first half of the year, coupled with a pick-up in building activity, could yet deliver a more noticeable decrease in prices, with a flow-on effect on consumer spending.

Bagrie, however, said he was "not convinced the consumer is going to remain out for the count".

The more that households shed debt and repaired their stretched balance sheets now, the stronger the position they would be in later, he said.

The Reserve Bank discounts the risk of a double dip recession in the United States and in any case expects New Zealand's export trade to be increasingly weighted towards the more buoyant economies of Australia and east Asia.

It believes export commodity prices will decline, though to levels that remain high by historical standards.

"This creates a good backbone for growth," Bank of New Zealand economist Craig Ebert said.

The BNZ's concern is rather that the Reserve Bank is too sanguine about inflation.

To the one-off impacts of the GST rate increase and other policy-related price rises - which the Reserve Bank says will push headline inflation to 4.8 per cent by the middle of next year - must now be added higher construction costs as a result of the earthquake.

"Should inflation expectations instead move higher, from being on the high side of comfort already," said Ebert, "then it will be game on for the Reserve Bank."

Since the Reserve Bank's previous monetary policy statement in June:

* The housing market has remained weak. That does not augur well for consumer spending which is historically closely correlated to the state of the housing market.

* Business confidence has declined and business sector credit growth remains negative.

* A steep drop in the unemployment rate recorded in March was largely reversed in June, leaving the rate at 6.8 per cent, down from a peak of 7.1 per cent in December 2009.

* Concerns rose about the strength of recovery in the United States.

* Export commodity prices eased, though they remain historically high.

* South Canterbury Finance collapsed, triggering a $1.6 billion payout under the Government's deposit guarantee scheme.

* An earthquake hit Canterbury.