KEY POINTS:
The Reserve Bank is unlikely to raise the official cash rate on Thursday, most economists say.
But they warn that the risk of further tightening of monetary policy this year remains high, and they expect a menacing statement from Governor Alan Bollard.
Thirteen of the 16 forecasters polled in a Reuters survey expect Bollard to hold the rate at 7.75 per cent. They put the odds of a rate increase at one in three.
ASB Bank economist Daniel Wills said that having raised the OCR in March and April, Bollard would now wait to see what effect these increases had.
Money market pricing reflects a similar view. Credit Suisse's swaps-based indicator on Friday showed a 31 per cent chance of a rate increase on June 7.
But the market sees it as more likely than not that Bollard will have increased interest rates again by the end of September.
Analysts from Westpac, the Bank of New Zealand and Infometrics are the three who expect a rate rise next week.
They point in particular to the Reserve Bank's need to lean against an increasingly stimulatory fiscal policy and Fonterra's bumper projected payout to dairy farmers next season.
"We believe the Reserve Bank will conclude that the potential regret from delaying a necessary move is now greater than that of having to undo an unnecessary one," said Westpac chief economist Brendan O'Donovan.
But while the projected payout would put the equivalent of 1 per cent of gross domestic product into the economy, it is uncertain how much of that farmers will spend and how much they will use to reduce debt.
Overall, commodity prices have climbed 6 per cent since the Reserve Bank's last interest rate rise, in April.
But the exchange rate has been higher than the bank expected. On a trade-weighted basis its average value this year has been 1.7 per cent higher than the bank's projection.
Confidence among manufacturing exporters in the National Bank's monthly survey last week has slumped to its lowest level since the survey began 19 years ago.
The Treasury estimates the stimulus to demand in the economy from the Government's fiscal policy in the coming June year will be more than twice as much as it was in the year ending, and half as large again as it forecast last December, even assuming widespread immediate take-up of KiwiSaver.
Deutsche Bank chief economist Darren Gibbs said such estimates were very imprecise, but the pressure for an even more expansionary fiscal policy was continuing to grow.
"We think it is virtually inevitable that the Government's marked decline in popularity will have implications for next year's pre-election Budget," Gibbs said.
But another important driver of demand in the economy, net migration, has slowed dramatically.
For the first four months of this year, the net inflow of permanent and long-term migrants was only 1300 - less than a third of what the bank's forecasts assume.
First NZ capital economist Jason Wong said house sales were also clearly declining, with four consecutive monthly falls on a seasonally-adjusted basis.
But any comfort about the housing market the Reserve Bank might take from declining immigration and sales would be offset by accelerating house price inflation, Wong said.
Underpinning the housing market is job security.
Despite some well-publicised plant closures, the latest household labour force survey showed the economy created 25,000 jobs in the March quarter, boosting employment by 1.2 per cent. The unemployment rate is a low 3.8 per cent.
On the other hand, the most recent figures show wage inflation is at least not accelerating, and last week's business confidence survey recorded a drop in firms' hiring intentions, consistent with declines in their overall confidence, profitability, investment intentions and export expectations.
Consumer confidence has also weakened.
But from the standpoint of a Reserve Bank which has for some time been looking for a moderation in spending, any softening of consumer sentiment is from a very high base.
The March quarter recorded the strongest growth in retail sales volumes since the mid-1990s.
Wong points out that much of that growth was caused by discounting to clear stock and to the high dollar making imported wares cheaper, and that these are disinflationary phenomena.
And the March quarter sales preceded the two official cash rate rises Bollard has dispensed this year.
The noes have it
* The market sees only a one-in-three chance that the Reserve Bank will raise interest rates on Thursday.
* Most analysts point to signs the economy is weakening - falling business and consumer confidence, a decline in house sales and shrinking net migration - and say it would prudent to wait and see if the two recent rate rises are enough.
* But others say a stronger-than-expected fiscal stimulus and Fonterra's projected payout will counteract that and a king hit is required.
