KEY POINTS:
The money markets see no chance at all that Reserve Bank Governor Alan Bollard will cut the official cash rate on Thursday but are looking for the statement to be less stern than in the last review six weeks ago.
The economic indicators since then have pointed to a rapid cooling in economic activity. But they have also shown inflation - the bank's over-riding concern - is running hot.
Speeches Bollard has given since the March monetary policy statement offered no sign that he has changed his mind about the need for interest rates to stay high for some time yet.
Pricing on wholesale money markets implies rates will be 90 basis points lower by this time next year, with half the easing occurring before the end of this year.
And nearly half of the market economists polled by Reuters expect Bollard to have cut the OCR at least once by the end of the year.
Consumer confidence is at its weakest since the last recession 10 years ago, and retail sales are flat-lining.
The stimulus to consumer spending from the housing boom has been turned off. The median house price is 4 per cent below its peak late last year and with turnover running at half its levels a year ago further price declines are expected.
Business confidence, meanwhile, by one measure is at its weakest since 1974 and by another is at levels suggesting the economy is already contracting. But Deutsche Bank chief economist Darren Gibbs said he shared Bollard's view that the decline in sentiment was probably overdone.
"It reflects as much as anything the fact that after so many years of strong growth businesses and households have forgotten what a cyclical downturn looks like."
While growth forecasts for New Zealand's trading partners keep getting revised lower, the impact on export commodity prices has so far been limited.
ASB chef economist Nick Tuffley said that even with production affected by drought, Fonterra's forecast payout for the current season implied $3.25 billion in extra income to the economy, equivalent to nearly 2 per cent of gross domestic product.
A further stimulus will come from tax cuts, perhaps as early as October.
Westpac chief economist Brendan O'Donovan said that given the healthy fiscal position and a sharply slower economy, the stimulus could be considerably bigger than the $1.5 billion the Reserve Bank was assuming.
Household finances are under pressure, however, from steeply rising food and energy prices at a time when rents are rising and higher funding costs for the banks are putting pressure on mortgage rates.
Inflation hit 3.4 per cent in the March quarter, which means that it has averaged just a whisker under 3 per cent, the top of the Reserve Bank's target range, for the past three years.
"With inflation having been so high for so long the Reserve Bank will feel it can ill afford to ease soon," said Tuffley. "The upshot would be only modest economic growth accompanied by even higher inflation than currently envisaged, creating an even bigger headache for a later stage."
All the inflation gauges are in the red zone.
In the March quarter non-tradeables prices rose 1.1 per cent, making 3.5 per cent for the quarter, and even with the dollar high tradeables inflation is running at 3.4 per cent.
The trimmed mean measure of core inflation, which disregards the largest rises and falls and reflects the broad mass of prices in between, is 3.5 per cent.
NZIER's quarterly survey of business opinion found a sharp rise in the proportion of firms which have increased their own prices in the past three months or which intend to increase them.
THE ROAD AHEAD
* Thursday's review of the official cash rate is expected to leave it unchanged at 8.25 per cent.
* The Reserve Bank is expected to acknowledge a weaker outlook for growth.
* But continue to give greater weight to inflation concerns.
