Reserve Bank Governor Alan Bollard is expected to keep the official cash rate on hold at its historic low of 2.5 per cent when he reviews it on Thursday.

Most of the economic forecasters polled by Reuters (10 of the 18) expect it will be the March quarter next year before the bank begins to raise the OCR; none thinks it will be sooner than that.

The bank's June monetary policy statement indicated it did not expect to raise the OCR until the June quarter.

The flow of economic news since then is not seen as likely to fundamentally challenge that view. The inflation outlook is benign at this stage, and the international outlook is troubling enough to warrant keeping the bank's remaining powder dry lest emergency rate cuts be needed to bolster confidence, as after the global financial crisis and the Christchurch earthquake.


The focus of euro-angst has shifted from Greece to Spain but not diminished.

March gross domestic product was a positive surprise, for the Reserve Bank as for other forecasters, but much of the 1.1 per cent growth recorded for the quarter was attributable to a one-off: bumper growing conditions in the primary sector and its downstream processing.

Consumer price inflation for the June quarter at 0.3 per cent undershot Reserve Bank and consensus forecasts of 0.5 per cent, testifying to soft demand and the impact of a US80c dollar.

The exchange rate is sitting 4.8 per cent higher on a trade-weighted basis than the June statement assumed for the current quarter.

"Since its early June low the New Zealand dollar has risen 6 per cent while the global price of New Zealand's export commodities has fallen - a combination that will have gone down like a lead balloon at the central bank," Westpac chief economist Dominick Stephens said.

"The Reserve Bank may deliver another broadside, warning markets that the exchange rate is overvalued and will exacerbate economic imbalances."

Stephens sees the dollar as more likely to rise than fall over the coming year, driven by quantitative easing in the United States and Europe, recovering growth in China, and high global food prices because of the US drought.

A benign inflation outlook, and the chances that new Reserve Bank Governor Graeme Wheeler will initially take a conservative approach, has led Westpac to push back its forecast timing of the first OCR rise by four months to July next year.


Once under way, though, Stephens expects the OCR to rise much more steeply than the gentle trajectory the Reserve Bank pencilled in in June. He is picking four OCR hikes over the second half of next year as burgeoning inflation pressures emerge.

The housing market is gathering momentum.

The Real Estate Institute's stratified house price index has risen 3.4 per cent over the first half of 2012 on a seasonally adjusted basis, led by Auckland.

Bank of New Zealand economist Craig Ebert says the house price bubble of 2004 to 2007 never really popped.

The housing market remains overvalued by a number of metrics, he argues, including relative to household disposable incomes, relative to the trend in real house prices and relative to rents.

"That the housing market is stuck in clearly overvalued territory is a bit of a worry," Ebert said, "especially in that it might mostly be a consequence of the very low interest rate settings in place at the moment."

But the Reserve Bank was probably averse to removing the monetary stimulus it has in place - "Not only because it might actually cause a proper correction in home prices ... but also because of the wider economic distress any OCR lifts might cause."