Hit to commodities, housing slowdown mean Reserve Bank must tread carefully, says ANZ.

A few cracks are starting to appear in New Zealand's economic story, says ANZ chief economist Cameron Bagrie. The central scenario hasn't changed; he's still forecasting annual average growth at a brisk 3.7 per cent this year, slowing to 2.9 per cent next year.

"But at the moment I can see some subtle shifts in the risk profile."

ANZ calculates a financial conditions index which reflects not only interest and exchange rates, but also asset prices (including housing), commodity prices and credit growth.

Bagrie said financial conditions had tightened materially, from levels flagging 5 per cent economic growth to a more feasible and realistic 3 per cent.


The kiwi dollar remains as strong as an ox despite falling commodity prices - dairy and forestry especially.

ANZ has revised down its estimate for this season's dairy payout to a level that would imply a $3 billion drop in dairy farmers' incomes.

And Bagrie describes the state of the forestry sector as "carnage". "I don't use that sort of term lightly," he said.

The pummelling log prices took about eight weeks ago was now flowing into activity - or, rather, the lack of it.

"In the housing market I think prices at the moment are actually falling. Annual per cent changes still look okay but when I look at the market I think house prices are starting to nudge back a little bit."

The Reserve Bank has raised the official cash rate at each of the last three reviews and financial markets expect it to do so again on July 24.

Wholesale interest rates had moved higher and were now much more aligned with the Reserve Bank's interest rate projections, he said.

"As a consequence fixed mortgage rates have started moving up and the Reserve Bank will be happy about that."


As the mortgage rate curve flattens it provides fewer places for borrowers to hide from rising interest rates.

"The household sector as a whole is still injecting more funds into the residential property stock than it is withdrawing from it, suggesting that households are not front-running the expansion," Bagrie said.

"Our estimates suggest the household savings rate has now nudged into positive territory, but this is margin of error stuff."

The financial conditions index doesn't capture the effects of the Canterbury rebuild or the positive impact on growth from the surge in net immigration.

"The underlying growth story is still looking robust and there is still some upside risk from migration, but there are a few more risks starting to open up on the downside and they are looking non-trivial," he said.

Monetary policy has done the initial heavy lifting, tightening financial conditions.

"But we're getting close to the stage when the Reserve Bank will be looking to pause," Bagrie said.

"Policy needs to tread more carefully when you're heading down towards trend growth. There's a tendency for monetary policy to over-achieve and the economy to undershoot as a result."

The fabled soft landing is something of a mirage, he said. "The market at the moment is expecting two more [OCR increases] before the end of the year. I'm not convinced. But we will get one."