Reserve Bank expected to leave key interest rate on hold this week and drop talk of next move being upward.

The prospect of further rises in the Reserve Bank's official cash rate has disappeared over the horizon - at least the time horizon within which it is useful for the bank to give guidance or for market economists to forecast.

When the bank reviews the OCR on Thursday it is universally expected to leave it on hold at 3.5 per cent and widely expected to drop its "tightening bias", the language which shows it thinks the next move, when it comes, will be upward.

"The Reserve Bank won't need to lift the OCR over the next couple of years," said ASB chief economist Nick Tuffley. "We are no longer explicitly forecasting future OCR increases."

ANZ economist Mark Smith said: "We now expect no further hikes for the foreseeable future."


Westpac chief economist Dominick Stephens has pencilled in a rate rise for June next year but added: "The prospect of OCR hikes is now so distant that debating the exact timing is a red herring."

Deutsche Bank chief economist Darren Gibbs expects the central bank to say something along the lines that "policy settings are likely to remain unchanged for an extended period" with the usual caveat that it will depend on what emerges in the economic data.

Gibbs thinks the Reserve Bank might still on balance believe, as it indicated last month, that some modest further tightening of the monetary screws is likely to be needed at some later stage.

"However, we think the likely timing of that tightening will now be viewed as so distant - certainly outside a 12-month window - that it makes little sense to highlight it in [this] statement. The statement will appear 'neutral' for all intents and purposes."

Since the December statement the annual inflation rate has dropped to 0.8 per cent from 1 per cent in September.

And the low inflation is not just about plunging global oil prices. Excluding transport fuels it would still have been just 1.1 per cent, Statistics NZ reported, which is barely within the Reserve Bank's 1 to 3 per cent target band.

The impact of the collapse in oil prices has only started to show up in headline inflation, which economists now expect to fall close to or even below zero.

But an oil shock is the kind of development monetary policy should "look through" or ignore unless or until it spills over into prices more broadly.


In this case the boost to households' spending power only partially offsets the hit to national income from a halving of export dairy prices.

The Reserve Bank also has to take account of a weaker global environment, with growth slowing in China, petro-economies facing shrinking revenues, Japan in recession and Europe swimming close to a deflationary rip if it is not already caught in one. Even in the United States, where there is the prospect of the Federal Reserve starting to normalise interest rates, its watchword is "patient".

"The recent rise in the New Zealand dollar against the euro and the Australian dollar will further suppress inflation over the year ahead," Stephens said.

But in the context of a booming housing market, strong construction activity and rapid population growth cutting the OCR at this point would be a mistake, he said.

Even so the risk of a rate cut is not zero and the financial markets have begun to price that risk into wholesale interest rates.

"As swap rates fall in the weeks ahead fixed mortgage rates will continue to come down," Stephens said.

Tuffley said, however, that even the strong housing market in 2013 had not been much of an inflationary threat, with growth in consumer spending relatively contained.

"Any sustained heat in the housing markets is likely to be viewed as a financial stability issue first and foremost.

"In that situation we expect the Reserve Bank would prolong the use of loan to value ratio restrictions and - if practical - implement other micro-prudential measures such as debt servicing restrictions and its proposed commercial treatment of property investors owning more than five houses," Tuffley said.