"Still, the housing market is not dangerously overheated and household debt levels are growing only modestly, so the Reserve Bank may not alter its core views at this stage."
Households' mortgage debt grew 2.8 per cent in the year ended October - its fastest pace since mid-2010 but nothing like the double-digit increases which marked the mid-2000s boom.
ASB chief economist Nick Tuffley said the current heat in the housing market in Auckland and Christchurch was largely a result of undersupply and over time construction should increase and ease supply constraints.
Building consents have been picking up, but from a low base. In the year ended October they were up 20 per cent on the previous year but still more than a third down on the year to October 2007.
With mortgage rates at 50-year lows, Tuffley said there was a growing risk of fuelling demand in supply-constrained regions.
Dropping interest rates in this environment would be reminiscent of the cuts made in 2003 which stoked an already hot market and which former Governor Alan Bollard has acknowledged was, with the benefit of hindsight, a mistake.
Swaps pricing implies an expectation in the money market that the Reserve Bank will cut the OCR by June next year.
But according to the latest Reuters poll, economists continue to expect its next move to be a rise in the OCR, though not until late next year or 2014.
Stephens expects the bank's forecasts for economic activity to emphasise the boost from the Canterbury rebuild, although that will be offset by government austerity.
Since the September monetary policy statement the run of economic data has been soft, and weaker than the bank, or other forecasters, had expected.
Inflation has fallen to just 0.8 per cent, unemployment has jumped to 7.3 per cent and retail sales in the September quarter declined.
Consumer confidence remains becalmed.
In the latest ANZ Roy Morgan poll a net 5 per cent considered themselves worse off than a year ago, even though real household incomes have risen on average 1.3 per cent in the the past year, as much as they did altogether over the previous four.
The New Zealand dollar remains stubbornly high - though not much more sothan the bank forecast - and the annual trade deficit widened to $1.4 billion in October.
Bank of New Zealand head of research Stephen Toplis said the economy was going through a soggy patch and the Reserve Bank would have to lower its inflation forecasts and indicative forward track for interest rates.
"That said, we are hanging, by our fingernails, to the view that the economy is far from dead and does not warrant extra monetary support."
Toplis said a drop in New Zealand interest rates would not bolster Australian demand for New Zealand exports, it would probably have little impact on the exchange rate, and it would be unlikely to boost consumer or business spending because the level of interest rates was not providing a hurdle in those areas.
