KEY POINTS:
Inflation watchdog Alan Bollard is expected to growl but not bite when he delivers the December monetary policy statement on Thursday.
The money market sees only a one-in-six chance that the Reserve Bank Governor will raise the official cash rate from 7.25 per cent, where it has been for the past year, according to Credit Suisse's swaps-based indicator.
And in a Dow Jones Newswires poll only one of the 15 market economists surveyed expected him to raise rates, although four thought he should.
But the tone of the statement is expected to be stern, with the possibility of another rate hike left on the table and a warning that an easing is still a considerable way off.
Westpac economist Nick Tuffley said the consensus, to which he subscribed, was this year's subdued growth would continue for much of next year - a soft landing rather than the much bumpier one in 1998. "For the Reserve Bank the main inflation risk is that the economy doesn't so much achieve a soft landing as a touch-and-go, taking off again as soon as it has touched down. There are a few signals that the economy could be picking up, notably housing and improved business and consumer sentiment."
However, a near-term drop in inflation, lower inflation expectations and the New Zealand dollar's rise over the past few months provided a more than adequate offset, Tuffley said.
When he last reviewed interest rates in October, Bollard said lower petrol prices (which have been maintained), the resurgent dollar (higher still now) and the statisticians' reweighting of items in the consumer price index had significantly improved the near-term inflation outlook.
"These are temporary factors, however, and apart from the likely favourable impact on inflation expectations, they are not expected to impact materially on medium-term inflation," the Reserve Bank Governor said.
It is the medium-term horizon that he has to scan in setting the OCR, because of the long lags between changes to the rate and changes to economic activity and then prices.
Prominent among the clouds on that horizon is the continuing resilience of the housing market, supported by high net immigration and a competitive banking sector. The median national house price jumped last month after four months of stagnation, and the time it takes to sell a property is the shortest it has been this year.
Tuffley said the housing market and household finances were stretched and logic dictated there was only so long that either could stay aloft.
In October, Bollard also cited the tight labour market as a cause of caution. Since then the household labour force survey recorded a 0.4 per cent drop in employment in the September quarter but that followed rip-roaring 2 per cent job growth in the first half of the year and, as Deutsche Bank chief economist Darren Gibbs notes, PAYE revenue continues to grow unabated.
Gibbs said firms' surveyed investment and hiring intentions were now at new highs for the year and expectations of further fiscal loosening and of increased activity ahead of the 2011 World Cup were probably also underpinning confidence. He also pointed to a 2.2 per cent rise in core (non-vehicle) retail sales in September and credit card data suggesting that was maintained in October.
But First NZ capital economist Jason Wong said stock exchange-listed retailers continued to indicate a flat and challenging retail environment, suggesting some degree of caution in interpreting the pick-up in retail sales.
"Overall we don't regard the news over the past five weeks as significant enough to suddenly prompt the bank into action. That said, there's enough evidence to suggest that economic growth has stabilised and probably even recovered from its lows. The implication is that domestic inflation pressures aren't going to disappear in a hurry. This will keep the Reserve Bank on edge," Wong said.
Gibbs expected the bank to take the view, somewhat nervously, that the recent strength in the data would not be sustained. He expected Bollard to tread a delicate line: opening the way to a possible rate hike in the first quarter of next year, without creating the impression that one was likely.
