But thanks to low oil prices, weak global inflation generally and a New Zealand dollar still too high in the bank's view, it thinks inflation right now is zero and will stay below the 2 per cent mid-point of its target band for the next two years.
"There is absolutely no reason to lower interest rates while the economy remains so robust and pressures remain on the housing market," Toplis said.
"There is absolutely no reason to raise rates when there is no inflation. The hurdle to shift rates, in either direction, is now very high, such that the bank will probably have to be convinced that it needs to move rates 50 basis points before it makes its first move," he said.
"Given that such convincing will take some time, any move will also be later rather than sooner."
One thing that could trigger such a move would be if the move lower in inflation expectations over the past year continues and, crucially, is reflected in firms' wage- and price-setting behaviour to the point that it threatens a sustained undershoot of the bank's target of 1 to 3 per cent over the medium term.
The bank is wary of a deflationary rip emerging that would threaten its price stability mandate from the low side.
The statement yesterday includes a scenario - not its central forecast - in which inflation expectations settle near 1 per cent over the coming year, which it indicated would warrant 50 basis points of interest rate cuts in response.
But governor Graeme Wheeler, briefing both journalists and later Parliament's finance and expenditure select committee, was clear that it would be price- and wage-setting behaviour (not just surveyed inflation expectations) the bank would be watching closely.
The annual inflation rate has averaged 1.2 per cent over the past three years and the bank's forecasts average 0.9 per cent over the next two years.
Westpac chief economist Dominick Stephens said that while a fall in inflation expectations from their current level of around 2 per cent to 1 per cent was a plausible scenario it would take a long time to play out.
"We don't think it offers any encouragement to those betting on interest rate cuts in the near future."
When challenged on why he is not cutting interest rates when inflation is so low and so many other countries' central banks are easing, Wheeler said that in contrast to them New Zealand was enjoying strong growth in population, employment and output.
Labour force participation is high and the output gap positive.
At an OCR of 3.5 per cent the bank considers monetary policy still to be stimulatory, though it is having another look at its estimate that a neutral rate is 4.5 per cent.
"The cost of capital doesn't appear to be a major constraint for business," he said.
The bank changed its language on the exchange rate. It continues to call it unjustifiably and unsustainably high but a substantial downward correction is "needed" rather than "expected" as in previous statements.
"We concur but alas don't see that happening," said ANZ chief economist Cameron Bagrie. "Indeed the trade-weighted index is forecast to remain around current levels for the duration of the projection [two years]."
On hold
• Reserve Bank keeps the official cash rate steady at 3.5%.
• Growth forecast to stay above 3% on average over next three years.
• Annual inflation picked to average 0.9% over next two years.
