The Reserve Bank still sees interest rate increases in our future, but fewer and further away than it thought three months ago.
As expected the December monetary policy statement kept the official cash rate on hold at 3.5 per cent. It pencils in another three OCR hikes (a cumulative three-quarters of a percentage point) over the next three years, the first most likely in December next year.
That, as always, depends on the economy obediently following the bank's forecasts and the soundness of the assumptions underlying them.
It has revised up the outlook for economic growth next year and the year after to just over 3 per cent, compared with an average of 2.5 per cent in the September statement, despite the hit to dairy farmers' incomes from a halving of export prices since February.
It would represent only a modest deceleration from current growth of around 3.5 per cent.
The bank expects the drop in dairy farmers' spending to be less dramatic than the drop in their incomes, given the extent to which last season's bumper payout has been used to repay debt and boost bank deposits.
And it will be partially offset by the lift to spending power generally from the steep drop in oil prices.
A growth rate of just over 3 per cent would not be much stronger than the bank's current estimate of the sustainable non-inflationary growth rate which it puts at just under 3 per cent, boosted by strong net immigration and business investment.
The bank is candid that it has not got to the bottom of the problem of the "missing" inflation it flagged in September. Inflation is proving persistently weaker than past relationships suggest it should be at this stage of the cycle.
It acknowledges a risk that it may still be underestimating how much growth the economy can handle without inflation becoming an issue.
But Bank of New Zealand head of research Stephen Toplis said there was now as much of a risk that non-tradables inflation could turn out stronger than the Reserve Bank expected as weaker.
One of the assumptions the bank is making is that house price inflation will stabilise at around 5 per cent next year or about half the rate before it introduced loan-to-value ratio curbs in October last year. Governor Graeme Wheeler acknowledged the most recent data which suggested the Auckland market is gaining a second wind but said some of that might be seasonal or reflect the removal of pre-election uncertainty about a capital gains tax. He expects to have a clearer picture by March next year.
In any case the bank has no plans for any further moves on the macro-prudential (LVRs) front, though it continues to consult the banks about whether the risk weighting for lending to property investors needs to be adjusted.
Another important assumption is that the net inflow of migrants is at its peak. If so it would be at a level adding 1.4 per cent to the working-age population on an annual basis and half as large again as during the previous mid-2000s peak.
The bank expects some recovery in export dairy prices, including about a 45 per cent rebound in the US dollar price of whole milk powder late next year. It thinks that even with low grain and oil prices - key inputs for northern hemisphere producers - current milk prices are too low for anyone to make money and that the most uncompetitive producers will be driven from the market.
Westpac chief economist Dominick Stephens said with oil prices at a five-year low he expects inflation to fall below the bottom of the Reserve Bank's 1 to 3 per cent target band over next year.
"We suspect the bank will want some clear evidence inflation is returning to within the target band - and staying there - before raising interest rates again, and on our forecasts that evidence won't be forthcoming until early 2016," Stephens said. "That said, it may well spend the next year warning of interest rate hikes ... in order to avoid pumping up an already-buoyant housing market."
Reserve Bank forecasts
• Growth to average 3.1% over the next two years.
• Inflation to stay under 2% until late 2016.
• House price inflation to stabilise around 5%.
• The overvalued dollar to decline, but only gradually.
• Unemployment to ease to 5% by 2017.