The Reserve Bank still sees interest rate increases in our future but fewer and further between than it foreshadowed three months ago.
The low-key monetary policy statement it released this morning has a projected track for interest rates - always hostage to events and only ever pencilled in - with three further hikes of 25 basis points by the end of next year and another two the year after.
It splits the difference between where the financial market has been sitting lately and the more aggressive tightening the bank itself envisaged in June. It does not look like an attempt to yank the market's leash in a more hawkish direction.
But even after the flurry of four official cash rate hikes since March the bank is only half way towards returning interest rates to what it considers a neutral level, where they are neither a tailwind nor a headwind for the economy. It expects to get there in a couple of years' time.
As expected it has left the OCR on hold at 3.5 per cent and signalled it will stay there while it undertakes "a period of monitoring and assessment."
It has to weigh the effects of the rate hikes it has administered since March. It sees house price inflation moderating - perhaps more than past experience would have indicted - and it expects it to fall to zero in three years' time.
It also has to weigh the impact of export dairy prices nearly halving from their peak last February.
It sees a bit in a bungy cord there, expecting the build-up in Chinese inventories of dairy products to clear in coming months. The decline in forest product prices, it suspects, is more reflective of underlying demand.
So far the exchange rate, though 6c off its peak against the US dollar, has not reflected the decline in the terms of trade and remains unjustifiably and unsustainably high, in the bank's view.
Reserve Bank governor Graeme Wheeler will announce the OCR decision tomorrow. Photo / Mark Mitchell
"We expect a further significant depreciation," governor Graeme Wheeler said.
He pointed to market expectations that it will not be until around April next year before he starts raising New Zealand interest rates again, by which time the foreign exchange market will be focused on looming interest rate rises in the United States and England - lessening the risk of upward pressure on the kiwi dollar from interest rate differentials..
The bank's policy assessment mentions net immigration three times with its five paragraphs. Like other forecasters it has been surprised by the strength of the net inflow but its suspect that there will be less impact on the housing market than similar numbers would have implied in the past. That is partly because much of it has been a matter of fewer people leaving the country (an effect felt as much in the regions as in Auckland) and also because those arriving, particularly for the Christchurch rebuild, may be younger, with fewer dependents. Those at least are the sorts of factors it aims to assess during the period of monetary policy pause.
With a general election looming the governor studiously avoided anything remotely political, and fiscal policy does not get a mention in the 20 pages of the MPS.
