With export commodity prices falling, fiscal policy contractionary, and the rebuild of Canterbury yet to gather pace, monetary policy carries the burden of supporting the economy through what is still a tepid recovery.

As universally expected governor Alan Bollard left the official cash rate at its all-time low of 2.5 per cent this morning and the accompanying statement makes clear the bank has not changed its view of the world since its June forecasts were released.

While there is a "limited" risk the euro area's woes get a lot worse, domestically "the bank continues to expect economic activity to grow modestly over the next few years. Housing market activity continues to increase as forecast, and repairs and reconstruction in Canterbury are expected to further boost the construction sector. Offsetting this, fiscal consolidation and the exchange rate are constraining demand growth."

The policy conclusion is non-committal: "It remains appropriate for the OCR to be held at 2.5 per cent."


The bank's dilemma is that is caught between overvalued housing and an overvalued dollar.

While consumer price inflation is a benign 1 per cent, giving the bank time to await developments, property price inflation is on the rise again, especially in Auckland.

The bubble of the last decade never burst and now threatens to expand further, making already lousy affordability metrics even worse and potentially threatening the kind of bust which has laid waste other economies.

This is an argument for the bank to start raising the OCR, which is underpinning the lowest mortgage rates for 50 years.

But higher interest rates are the last thing firms on the wrong end of a US80c need.

As it can't both raise and lower the OCER, the bank has split the difference. But at some point it will have to choose which is the bigger danger.