KEY POINTS:
Reserve Bank Governor Alan Bollard has missed his best opportunity to dampen the consumer's enthusiasm through higher mortgage rates, ANZ National Bank chief economist Cameron Bagrie says.
He was commenting as the bank released its latest business outlook survey which found confidence has climbed to a three-year high.
The proportion of firms planning to raise their prices has risen as well - not what an increasingly hawkish Reserve Bank would want to see a week before an interest rate decision.
"The economy has remained remarkably resilient in the face of tighter monetary conditions over 2005 and 2006 and could continue to do so," Bagrie said.
But much of the strength was related to housing rather than those sectors by which the country earned its living.
People were feeling bullet-proof, he said: "They are proving insensitive to interest rate moves because they think they will have a job forever. But we know that there's a lot of debt and house prices are inflated. We don't know how close we are to the [bubble] popping point."
Bagrie argued that by not tightening last October, the Reserve Bank had missed the best opportunity to deliver a rise in the effective or average mortgage rate - when the two-year loans taken out in the "mortgage war" expired.
A fresh wave of discounting by the banks and the opportunity to lock in lower rates at longer terms meant that instead of the 25-basis-point increase in the effective mortgage rate the Reserve Bank was expecting, the rise so far was probably only about 10 points, he said.
And for the loans due to expire over the next three months, most had been fixed for one year only and could even be reset at lower rates if borrowers went out three to five years, he said.
To get the effective mortgage rate above the 8.1 per cent the Reserve Bank had projected for the middle of the year would now require two hikes in the official cash rate.
The National Bank's February survey found 24 per cent of firms expect business conditions to get worse over the next 12 months, while 18 per cent expect them to get better.
The net 6 per cent of pessimistic companies is an improvement from a net 8 per cent in the previous survey in December.
Businesses' views of their own prospects have also improved, despite export intentions falling to an 11-month low.
Money is being spent on infrastructure and the 2008 Budget looks like being a "monster", but on the other side of the ledger, the Reserve Bank's patience is running out, Bagrie said.
While the bank is looking for evidence that housing and consumer demand are moderating, the survey found intentions to raise prices are strongest in the retail and construction sectors, which have shown the greatest rebound in growth.
Bagrie said that while the economy's recovery had a more sustained look about it, he questioned the magnitude of the rebound.
"Just as early last year everyone thought the economy was heading into recession, now they feel bullet-proof. But companies' earnings reports say they are finding the going tough," he said.