World dairy prices have lurched lower since the last OCR review in September and while there has been some offset in other commodities, notably beef, commodity export prices generally have already recorded virtually all of the 14 per cent decline the bank's forecasts assumed would occur by March next year. That suggests the hit to national income and the demand side of the economy will prove greater than the bank was reckoning on.
To some extent the fall in dairy prices has been mitigated by a drop in the exchange rate. On a trade-weighted basis the kiwi dollar is nearly 3 per cent lower than the bank's forecasts assumed for the current quarter.
That is not necessarily menacing from an inflation point of view, however. Research the bank has done on the pass-through to domestic prices of previous falls in the exchange rate found those which are driven by weaker commodity prices have a much more muted effect.
And this time the fall in dairy prices is part of a general decline in commodity prices, including oil.
"Oil prices have fallen substantially," ASB chief economist Nick Tuffley said. Global growth prospects, which have weakened, and current pricing in the oil futures market suggest current low prices could continue over coming quarters, despite geopolitical tensions in the Middle East, he said.
Even for those countries where some tightening of monetary policy is in prospect, the expected timing of it has been pushed back.
Deutsche Bank chief economist Darren Gibbs said the Reserve Bank would be cognisant of the fact that the further depreciation of the kiwi it wants to see is less likely if it raises interest rates while the policy rates of major countries remain on hold.
"We think it is clear that the Reserve Bank is hoping that the next phase of policy normalisation will occur at the same time as other key central banks are tightening their policy ..." he said.
The exchange rate has fallen 7 per cent from its peak last July but Westpac chief economist Dominick Stephens expects the Reserve Bank to indicate that that is not enough and that it remains at "unjustified and unsustainable" levels - code for possible further intervention.
Meanwhile, the housing market and household credit growth remain subdued, and Wheeler hinted in a speech on Friday that the impact of his loan-to-value ratio curbs - as equivalent to 25 to 50 basis points of interest rate increases - has been somewhat greater than the banks had expected.
Stephens said fixed mortgage rates had declined sharply in recent weeks.
"We rather suspect that the Reserve Bank will be quietly pleased by this proxy monetary easing, and may let it slide without a mention in this OCR review."
