KEY POINTS:
Financial markets expect another close call from the Reserve Bank on Thursday when it releases its monetary policy statement.
Most market economists expect the central bank to leave the rate unchanged at 7.75 per cent but they acknowledge the strong possibility of a hike to curb inflation.
Fonterra expects to pay $5.53 for a kilogram of milk solids in the new season from October, up 27 per cent on the current season's payout, injecting $120,000 to the average farmer's payout next year.
Bank of New Zealand chief economist Tony Alexander said while the latest National Bank business outlook showed business confidence was deteriorating, the survey did not take in the impact of the Fonterra payout.
The central bank is certain to pay close attention to this payout and the forecast impact of the recent budget.
Adding to those factors are the still strong housing, employment and retail markets.
"At a pinch we think the bank will tighten but it will be a close call," Alexander said.
He criticised Reserve Bank Governor Alan Bollard for "failing to deliver the killer blow" to inflation much earlier.
The Citigroup senior economist Annette Beacher said the impact of the Fonterra payout had been overestimated.
"Yes, it is obviously dollars in the pockets of the rural sector but I don't think that translates into a need for further tightening," she said. "I just think that there are too many hurdles between the fact that the rural sector has got an unexpected bonanza and why homeowners should be belted even further."
Beacher said that with interest rates being so high, the attraction for farmers to retire debt, instead of spending up large, must be very strong.
She said the stimulatory effect of the budget had also been overplayed. "The numbers that I have crunched show the Budget is less stimulatory than last year's."
Deutsche Bank said the Reserve Bank would keep rates on hold but that it would issue a stern statement about the risk of inflation further down the track.
Westpac Institutional Bank expected to see two more rate hikes before the year's end.
"Even if no rate increase is delivered in June, we anticipate that a very hawkish statement will see rates higher across the curve than today's levels, as the market realises that the long-awaited easing is still but a speck in the distance," the bank said.
Westpac chief economist Brendan O'Donovan said that a tighter stance was likely to mean another upward movement in the exchange rate.
He said the Reserve Bank could issue more statements about the exchange rate level. "But these assertions may not succeed in their goal of preventing further appreciation," said O'Donovan.
