KEY POINTS:
We managed to get through last Thursday without Reserve Bank Governor Alan Bollard raising interest rates.
But it was a narrow squeak - and that's the scary part.
Because, on the face of it, it is crazy that the possibility of a further hike in the official cash
rate is even on the table at this stage of the cycle.
For two years now, the economy has been trudging along at an average quarterly growth rate of only 0.5 per cent, which is little more than half its average pace over the past six years.
Yet monetary conditions remain tight.
The OCR is 7.25 per cent, one of the highest policy rates going, and has been there for nearly a year. The kiwi dollar is over-valued. Oil prices have fallen.
If that is not enough to contain inflation, what on earth would it take?
Bollard put the possibility of another rate hike on the table in his September monetary policy statement. He cited in particular the "surprising" strength of the labour market and the continued momentum of the housing market.
Since then we have learned that house prices are still rising at a double-digit annual rate.
Building consents and net immigration are trending higher. The banks are paring their interest rate margins to the bone as they compete for the bulge of two-year loans maturing now.
On the labour market front, we will find out next week if wage inflation is still running hot and if jobs growth is still outstripping hours worked (evidence firms are hoarding labour) and outstripping economic growth (evidence of falling productivity).
This week's National Bank business sentiment survey recorded a jump in employment intentions, to the highest level in 1 years. The Institute of Economic Research's quarterly survey also found employment intentions above the norm.
So it is not obvious that the central bank's concerns about the housing and labour markets have been mollified.
Indeed, last Thursday's statement by the Reserve Bank, although immediately interpreted by the financial markets as meaning the risk of another rate hike this cycle had passed, sounded a whole chord of warning notes.
Bollard said medium-term inflation pressures, while abating gradually, remained significant and the inflation risks were skewed to the upside. Further tightening could not be ruled out and any easing was a considerable way off.
Indeed, the markets seem to be having second thoughts.
They are back to pricing almost a 50:50 chance that Bollard will raise the OCR at the next opportunity in December. And the fall in the exchange rate last Thursday has been retraced and then some.
What has made this downturn a soft landing - so far - are a couple of factors that insulate the household sector to a substantial degree from the chilly winds blowing through the business sector.
One is a shift to a structurally-tighter labour market.
It is remarkable to have an unemployment rate of only 3.6 per cent when the economy is going though a soft patch.
The population is ageing and that is not going to be significantly offset by a net inflow of immigrants. Given the gap in incomes which has opened up between New Zealand and Australia - and most other developed countries for that matter - it is likely we will continue to lose three New Zealanders for every four immigrants for the foreseeable future.
No wonder, then, if firms are reluctant to shed staff in this downturn for fear that when they need to hire again they will not be able to. Memories of acute shortages of skilled labour are fresh.
The other change is the switch from floating to fixed-rate mortgages.
More than 90 per cent of mortgage debt is at fixed rates, which makes it much harder than it used to be for the Reserve Bank to "get at" household spending power and house price inflation through adjustments to its official cash rate.
Expectations of where the OCR will be down the track are one influence on the cost of the funds the banks use for fixed-rate loans but so are international interest rates and, for most of the past few years, the second factor has been distinctly unhelpful from Bollard's point of view.
A floating exchange rate and an ability to access global capital markets has, on balance, been a boon for the economy.
But it means that it ends up being the exchange rate and not interest rates that do the heavy work when it comes to slowing the economy, even though it is the household sector and the housing market which are the seat of the inflationary problem.
This imbalance is still starkly apparent in the inflation statistics.
While overall inflation fell to 3.5 per cent in the year to September quarter from 4 per cent in the year to June, the fall was largely concentrated in those parts of the consumer price index influenced by the exchange rate and world prices.
Non-tradeables inflation, in the domestic sectors of the economy, remains "sticky" at 1 per cent a quarter.
Business confidence has perked up but it is because the continuing pain of an overvalued currency is outweighed by falling world oil prices, boosting households' discretionary spending power and easing business costs.
Lower petrol prices are also expected to see the December quarter's inflation out-turn come in low, possibly low enough to pull the headline inflation rate back into the bank's 1 to 3 per cent target band.
But as Bollard's statement last week stressed, that is short-term relief and it is medium-term inflation pressures that he has to focus on.
And it is hard to see those pressures being vented while the housing market refuses to take a breather, job security is still high, migration inflows are strengthening and there are tax cuts on the horizon.
"History shows that soft landings do not suppress inflation pressure," says ANZ National Bank chief economist Cameron Bagrie.
"Non-tradeables inflation pressure only subsides when the economy is either in, or on the cusp of, a domestic recession."
He concludes that the day of reckoning has only been deferred and the economy will resume a downward trajectory next year.
Crucial to that scenario is a downturn in the labour market.
"There's a lot of pressure on firms' bottom lines and a lot of focus on costs. It is just a matter of time before that gets into the labour arena," Bagrie says.
Meanwhile, the other palisade protecting the household sector is not impregnable either.
There is still some increase in the average mortgage rate coming down the pipeline. Two-year fixed-rate mortgages are being offered at rates about half a percentage point higher than the average rate being paid on loans with less than a year to run, which make up about a third of the total mortgage book.
We had better hope a combination of less job security and higher mortgage payments does enough to curb consumers' enthusiasm.
Because a future in which the Reserve Bank can only get on top of inflation by hammering the export sector until the economy tips into recession is too bleak to contemplate.
