KEY POINTS:
For Kiwi households it is a pretty grim picture the Reserve Bank paints in its latest forecasts.
Rising mortgage rates, high oil and food prices, falling house prices and a tougher job market are expected to mean almost no growth in household spending for the next three years.
But inflation will get worse - much worse - before it gets better, hitting 4.7 per cent by September this year and not falling back below 3 per cent until the year after next.
Governor Alan Bollard has his fingers crossed that the weakness of the economy will prevent people passing those higher costs on to their employers or customers.
Although he left the official cash rate unchanged yesterday, he has given the financial markets the loudest and clearest possible signal that his foot, after years on the brake, is now poised over the accelerator.
The markets now expect at least two cuts in the official cash rate before the end of the year, and that the OCR will be about 1.25 percentage points lower by this time next year.
But even so, the average mortgage rate will continue to climb, perhaps for another year.
That is because these days seven-eighths of all mortgage debt is in fixed-rate loans.
They were attractive when the world was awash with cheap money. But now as loans come up for an interest rate reset, borrowers have to confront the fact that there has been a global credit crunch since their old rates were set. They face mortgage rates more than a full percentage point higher.
The fixed-rate loans on offer before the bank's statement yesterday already assumed four OCR cuts in the coming year. Dr Bollard's statement indicates he may cut the OCR a bit more aggressively than that, which could lead banks to trim retail rates.
But that would be an adjustment to the right-hand side of the decimal point. People with fixed-rate loans coming up for a reset still face a move from 8 to 9 on the left-hand side.
As for the Budget's tax cuts, they would have a "significant but not major impact on inflation in the short term", Dr Bollard said.
But they also provided a timely offset to the many headwinds facing households.
