KEY POINTS:
The Reserve Bank is expected to leave interest rates on hold tomorrow, but to keep talking tough about stubborn inflation pressures and dismiss any idea of rate cuts in the near term.
Reserve Bank governor Alan Bollard has been hawkish all year about the inflation risk, threatening on several occasions a further rate rise, but has stayed his hand.
Thursday's decision is seen as more clear cut than October's rate review, which had the market pricing in a quarter point rise and forecasters split on whether the central bank would move.
"The near term inflation outlook is much, much easier for the Reserve Bank than it was three months ago and that's a point you can't really go past," said Goldman Sachs JBWere economist Shamubeel Eaqub.
"Patience is a virtue which the RBNZ should and will exercise."
The latest Reuters poll has all 16 forecasters predicting a no change in the official cash rate tomorrow, with the consensus view the next move will be a quarter point cut in the third quarter of next year.
Analysts said the central bank is faced with a mixed picture.
On the one hand it has a heartening fall in petrol prices, a stronger currency dampening imported inflation, an easing in the labour market and falling inflation expectations.
But offsetting that has been a 1 per cent rebound in retail sales volumes in the third quarter, property prices at record highs and rising around 10 per cent a year, and business confidence at near-two year highs.
"We expect the bank will take the view, somewhat nervously, that the recent strength seen in the data will not be sustained," said Deutsche Bank chief economist Darren Gibbs.
Annual growth slowed to a five-year low of 2.2 per cent in the June quarter but a recent Reuters poll has the economy slowing to 1.8 per cent in 2007.
The headline annual inflation rate eased to 3.5 per cent in the September quarter because of a drop in oil prices. It is expected to creep back within the central bank's 1 per cent to 3 per cent target zone by the end of this year.
The slower economic pace and reduced inflation track are expected to be reflected in the RBNZ's own economic forecasts, which will be released with the monetary statement.
But the current delicate balance of economic and monetary conditions, will see the central bank maintain its hawkish bias.
"Whilst the near-term outlook for headline inflation will improve dramatically...we do not expect the bank to depict a much more favourable medium-term inflation picture, if at all," Gibbs said.
Some analysts believe the central bank should be looking to an "insurance" rate rise to deliver a better mix of economic conditions, and say a further tightening early next year cannot be ruled out.
"If you get into the new year with some of these activity indicators, the bank's going to be awfully nervous and I wouldn't be at all surprised if it gets to the stage that they have to hike again," said Bank of New Zealand senior markets economist Craig Ebert.
- REUTERS
* nzherald.co.nz will have details of the Reserve Bank of New Zealand's monetary policy statement at 9.00am (NZT) tomorrow
