KEY POINTS:
It will take a meltdown on world financial markets over the next few days to keep Reserve Bank Governor Alan Bollard from raising the official cash rate from 7.25 to 7.5 per cent on Thursday, economists say.
And they do not see much chance of that.
If anything,
the tremors running though world markets since last Tuesday may have made it easier for Bollard to carry out his threat six weeks ago to raise the OCR.
The main effect of last week's sell-off on world share markets has been that investors have lost much of their appetite for risk.
That has reduced the "carry trade" activity that has tended to keep the exchange rate uncomfortably high.
The most common carry trade lately has involved investors borrowing Japanese yen for next to nothing, then exchanging them for high-yield securities in other currencies, such as the New Zealand dollar.
The kiwi dollar has lost 3c against the US dollar since Tuesday. A lower currency means a rate increase is less likely to hammer exporters.
Short-term wholesale interest rates in New Zealand reflect the market's belief that even with an OCR of 7.25 per cent, the Reserve Bank is not on top of inflation and therefore has not finished tightening.
In his last interest rate review, in January, Bollard said further tightening was likely unless there were clear signs of a moderation in domestic demand, especially in the housing market.
But there has been little evidence of that, said Deutsche Bank chief economist Darren Gibbs.
Housing market turnover was down 6 per cent in January, but that was after an 8 per cent December rise. Turnover was 19 per cent higher than in January last year, and it remains well above the long-term average.
The median house price is 9 per cent higher than a year ago.
Household borrowing grew 13.1 per cent in the year ended January, a slight rise on the annual figure a month earlier.
Retail sales in the December quarter grew 1.8 per cent, compared with 1 per cent in September. Spending on big items such as cars and appliances led the way.
Consumer confidence is underpinned by a tight labour market. The unemployment rate fell from 3.8 to 3.7 per cent in the December quarter.
Business confidence, meanwhile, is at its highest for two or three years - depending on the gauge being used - export commodity prices, especially for dairy products, are high, and immigration migrants is higher than the Reserve Bank expected.
In the light of the increasingly hawkish rhetoric from the bank, these factors leave market economists all but unanimous that Bollard will lift the rate on Thursday, and will leave the door open to further tightening.
If he did sit tight, his credibility would be "a bit of an issue", Gibbs said, and it would be likely to trigger a fall in wholesale interest rates, which would allow banks to cut their fixed mortgage rates.
"He is unlikely to want to do that," Gibbs said.
Many people had suggested that the international market action of the past few days could give Bollard an excuse to leave the rate unchanged.
"But so far it certainly isn't that. It is a correction that needs to be seen in the context of the strong gains of the past few months."
It would take a meltdown in world share markets in the next few days to forestall a rate rise.
ASB Bank chief economist Nick Tuffley agreed. Bollard would probably welcome a drop in the carry trade.
"He would like to see risk priced more appropriately and the New Zealand dollar not to be seen as a one-way bet."