It was very much a steady-as-she-goes statement from the Reserve Bank today, predicated on a belief the economy will muddle through the various challenges around.

The bank has lowered the forward track for short-term interest rates it has pencilled in, to the point that there is only 1 percentage point of increases altogether over the next three years. Instead of an escalator it is more a moving pavement with only a gentle upward incline.

As for the assumptions that it is based on, a key one is that the risk of another global financial crisis, emanating this time from Europe, has receded. It hasn't disappeared, though.

Another is that oil prices will moderate.


It is not hard to imagine scenarios where those assumptions turn out to be wrong.

Apart from that the bank's favourite word in these forecasts is "modest".

Household spending will increase modestly. Activity generally will increase modestly.

The dollar will decline modestly - at least it hopes so. Banks' funding costs will rise, but modestly and interest rates will increase, modestly.

Governor Alan Bollard is clearly worried about the dollar, however, noting the harm it is doing to the tradeables sector, especially firms competing with imports.

Sustained strength in the dollar would reduce the need for further increases in the official cash rate, he says.

He considers the dollar overvalued, though he won't say by how much.

And he is worried that we might have entered a period of competitive monetary policy.

All the major central banks are in their various ways easing - the Federal Reserve, the European Central Bank, the People's Bank of China, the Bank of Japan and the Bank of England.

Bollard said that having got this far without an outbreak of competitive trade policy, as had been feared for a while, it would be disappointing if competitive monetary policy broke out instead.

The bottom line, though, is that if the big forces pushing the kiwi dollar higher are global there is not much he can do about it, except keep the Reserve Bank's policy rate lower for longer.

And that is only one factor in the retail interest rates New Zealanders face.