KEY POINTS:
Reserve Bank Governor Alan Bollard gave more weight yesterday to inflation pressures New Zealand faces right now than to the risks down the track from a global slowdown as he left the official cash rate on hold at 8.25 per cent.
He acknowledged the turbulence on financial markets and the worsening outlook for the United States and European economies.
"We will be watching these developments closely, particularly their implications for the Asian and Australian economies and for world commodity prices."
While the level of uncertainty had increased, the bank still expected the economy to keep growing "reasonably well".
But it also sees inflation staying above 3 per cent through 2008, underpinned by a tight labour market, strong income growth especially from dairy payouts, an expansionary fiscal policy, rising food and energy prices, and the emissions trading scheme.
The statement was seen as endorsing current money market pricing which implies little chance of the bank easing until the last quarter of the year.
Rates are expected to be a quarter of a percentage point lower by this time next year, according to Credit Suisse's swaps based indicator. A rapid worsening in the international environment might bring that forward.
"But to see the Reserve Bank easing within the next six months we need something much more severe - in other words not just the US slowing but signs that that is being transmitted throughout our trading partners, particularly Asia and Australia," Deutsche Bank chief economist Darren Gibbs said.
"If you react to downside risks to growth at this point and those risks don't eventuate then you are going to have a horrible inflation picture facing you over the next couple of years. It's pretty horrible already."
In a scenario where the New Zealand outlook was weakening because of the global economy the kiwi dollar would be weak, Gibbs said.
"So the primary monetary stimulus in that environment is the weaker currency, backed up by a relatively modest interest rate easing and fiscal policy going into overdrive," he said.
"If things do turn out to be weaker over the next six months [Finance Minister Michael Cullen] can come to the rescue and deliver $2 billion or $2.5 billion worth of tax cuts."
Westpac is one of only two forecasters to think that the next move in the OCR will be up.
"It could be that slowing trading partner growth will do the Reserve Bank's disinflationary work for it, though it would have to be a fairly marked slowdown," its chief economist, Brendan O'Donovan, said.
"We still expect the Reserve Bank of Australia to hike rates in February, though it's a line call. Their economy is running rampant, inflation expectations are heading north rapidly and, unlike in New Zealand, their house price boom is reigniting on the east coast. A hike over the ditch would make raising rates here politically much easier for Dr Bollard."
ASB Bank economist Daniel Wills said global uncertainties made it unlikely Bollard would tighten further this year.
"By the same token OCR cuts look unlikely for 2008 as the Reserve Bank grapples with high and persistent inflation pressures from a host of domestic and external sources."
ANZ National Bank chief economist Cameron Bagrie said the Reserve Bank's statement was prudent in light of the uncertain environment.
It was a case of watching and waiting, and ensuring the mortgage rate curve continued to deliver higher rates to people rolling off fixed-term loans.
"And with inflation set to remain above 3 per cent during 2008 the bank needs to ensure that inflation expectations do not drift higher."
Bank of New Zealand economist Craig Ebert said Bollard's statement had struck the right balance and wisely not over-discussed both upsides and downsides.
"Talk at length about the global slowdown, US recession and equity market wobble and the markets would have thought Bollard and company are getting captured by it all and spooked," he said. "Flesh out the still significant upside risks to inflation in all their gory detail and the markets might have presumed a strong chance of a March hike."
How we rate
Official cash rates
* Japan: 0.5 per cent
* US: 3.5 per cent
* Europe: 4 per cent
* UK: 5.5 per cent
* Australia: 6.75 per cent
* New Zealand: 8.25 per cent
