KEY POINTS:
Reserve Bank Governor Alan Bollard is expected to keep the official cash rate on hold on Thursday, but to maintain the inflation-wary tenor of last month's monetary policy statement.
The money market has all but entirely discounted the possibility of a rate change, pricing in only a 2 per cent chance he will lift the rate from an already elevated 8.25 per cent.
A Reuters survey of 17 economic forecasters found they all expect rates to remain on hold.
In fact most expect no change by the middle of next year either - with the exception of UBS and Goldman Sachs JB Were, who expect a cut, and Westpac and Infometrics, who expect two further rate rises.
Last month Bollard focused on uncertainties that could mean growth was either weaker or stronger than forecast. Since then the downside risk from turmoil in global financial markets has abated somewhat.
So far growth forecasts for New Zealand's trading partners have been trimmed only modestly.
Locally the fallout from a rise in risk aversion has been mainly confined to the finance company sector; spreads between the official cash rate and 90-day rates, which threatened a more serious credit crunch, have returned to normal levels.
The upside risk Bollard cited last month was that a falling New Zealand dollar would amplify the effect of higher world prices on export revenues.
Since then world prices for export commodities have risen a further 1.8 per cent and far from falling the dollar has appreciated 4 per cent on a trade-weighted basis.
Meanwhile whatever concerns Bollard has about the prospects of a more stimulatory fiscal policy next year will only have been increased by news that the operating and cash surpluses for the 2006/07 year were even larger than expected and tax revenues in the first two months of the current year are running $360 million ahead of forecast.
Gross domestic product growth in the June quarter was stronger than the bank had expected and the March quarter was revised up too.
The Institute of Economic Research's quarterly survey of business opinion pointed to continued resilience in activity and pressure on resources, both of labour and physical capital. Reported cost pressures and pricing intentions were high.
Oil prices have risen 11 per cent in the past fortnight.
"Although higher petrol prices will help slow the economy they will also create inflation." Westpac chief economist Brendan O'Donovan said.
"Rents are likely to take off as landlords demand compensation for higher interest rates and little capital gain.
"And world food prices are going ballistic, with the dairy boom just the vanguard."
But not all the inflation gauges are in the danger zone. The outcome for the June quarter - flattered by one-off policy changes to health and early childhood education subsidies - reduced the annual inflation rate to 1.8 per cent. That ought to lower inflation expectations and might take some heat out of wage demands.
The housing market is soft. Sales are about 30 per cent lower than a year ago, the time it takes to sell a property has started to creep up and prices have been going sideways since April.
The Reserve Bank was already counting on the housing market to slow, ASB chief economist Nick Tuffley said, and at this stage would still be wary of whether the slowdown was going to be sustained or not.
"But by early 2008 we expect the Reserve Bank will be surprised how noticeably the market is slowing. All the signs are the market has rapidly lost momentum."
