KEY POINTS:
The weakening New Zealand economy has failed to sway the Reserve Bank, which opted to leave interest rates exactly where they were on Thursday.
Governor Alan Bollard surprised no one when he announced that the official cash rate (OCR) would remain at 8.25 per cent, where it has been sitting since July. But his comments did give a glimmer of hope to struggling homeowners.
Economists pored over the wording of the bank's press release for clues about when rates relief will finally arrive.
They noted the bank was now saying the rate would stay where it was for "a time yet" - not "a significant time yet" as it said six weeks ago.
The change in tone has prompted some bank economists to bring forward their predictions of when interest rates will drop.
Kiwibank moved straight away to slash its two-year lending rate to 9.29 per cent from 9.60 per cent, with the proviso that borrowers have 20 per cent equity in their purchase.
Economists at ASB Bank brought forward their prediction of when the OCR would drop from early next year to this December, although they were not yet forecasting if the cut would be 0.25 or 0.50 per cent.
ANZ National bank economists forecasted a drop this September, while Westpac economists remained cautious, saying that the market was getting ahead of itself by predicting a rate cut this year.
Westpac economist Brendan O'Donovan said the Reserve Bank was worried by an increasingly ugly near-term growth slowdown on one side, and a still-alarming inflation picture on the other.
"When stuck between a rock and a hard place, not moving is a fair response," he said.
In his statement on Thursday, Bollard said economic activity had weakened faster than the bank expected.
He said the drought, negative business sentiment, tighter credit controls, a weak housing market and weaker world growth were contributing to a grim outlook for growth this year.
But he added there was still a risk of rising wage pressure keeping inflation high.
Chris Tennent-Brown, ASB economist, said wages would play a big role in the Reserve Bank's decision when to drop the rate.
If rising prices are translated into higher wage demands, this could delay an OCR cut.
Tennent-Brown said economists would be looking closely at wages data for the first quarter of this year when it the figures came out in May.
"The labour market is what is all comes back to," he said.
"If the labour market index is continuing to set record highs, I think it's a tough environment for the Reserve Bank to be cutting rates, whereas if they think there are problems in the labour market, and wage inflation isn't going to be an issue, I think that gives them room to move."
Even when the central bank lowers the OCR, there is no guarantee the rates banks charge to borrowers will come down.
ANZ National Bank chief executive Graham Hodges said the effect of credit market turmoil on the profitability of the local banking sector might push interest rates for home buyers and other borrowers higher still.
An OCR cut would lower the starting point for the cost of borrowing, but ASB's Tennent-Brown said overseas factors were the main reasons mortgage rates were so high.
"The issue for retail rates is not the OCR right now," he said. "The fact that the Reserve Bank may or may not cut the OCR isn't really going to make a big different to all the uncertainty we are seeing offshore.
"The premiums all banks are having to pay are flowing into those higher mortgage rates."
