"Deliver a statement that is too dovish and it risks a rally in money market rates which might lead to much lower mortgage rates and excess stimulus for an already overvalued housing market that is far from its death throes."
ASB chief economist Nick Tuffley said the Reserve Bank had changed its tune since the June monetary policy statement (MPS) when it gave markets a metaphorical clip around the ears for driving term interest rates too low for its liking.
"Although we don't expect the Reserve Bank's growth and inflation forecasts to change much, we do expect it will forecast lower interest rates than it did in June to get those outcomes," Tuffley said.
A Reuters poll of 14 forecasters found that nine of them, including all the major New Zealand-based banks, expect governor Graeme Wheeler to keep the official cash rate on hold at 3.5 per cent until March next year.
On average they expect two more rate increases after that by this time next year, which would push the OCR to 4.25 per cent.
Money market pricing is more dovish, implying a total of 50 basis points of hikes by the end of next year, which would be 50 basis points less than the Reserve Bank had signalled in the June MPS.
Back then the bank said how far and how fast interest rates needed to move would depend on what happened to export prices, the exchange rate, net migration and the housing market.
Global auction prices for dairy products have fallen nearly 45 per cent from their February peak, wiping billions of dollars off projected farmer incomes for the new season.
Westpac chief economist Dominick Stephens said the June MPS contained an alternative scenario in which export prices fell 4 per cent more than the substantial fall already factored into the main forecast.
"Recent experience has not been quite that severe, but it isn't far off. In that alternative scenario the Reserve Bank indicated that the pace of OCR hikes would be attenuated by 20 basis points over two years," he said.
Partly in response to the lower dairy prices, the exchange rate has fallen, and is already at the level the bank assumed for the December 2014 quarter.
But Toplis said that would not have been the level anticipated if the bank had reckoned on the severity of the dairy price slump that has eventuated. "To put this in perspective, the Reserve Bank was looking for a 27 per cent fall in dairy prices over 2014. This is miles short of reality."
As for the housing market, Tuffley said house price growth continued to slow.
"The nationwide REINZ stratified price index has actually edged down very slightly in the three months to July. In contrast, house sales have started to edge up recently after steady decline in the wake of the LVR restrictions," he said.
"Despite that harbinger of stabilisation, we expect the Reserve Bank will be comfortable with housing developments."
But Stephens said fixed mortgage rates had fallen recently and borrowers were taking the opportunity to fix their interest rates.
"The average advertised two-year mortgage rate is now nine basis points lower than it was on the eve of the first OCR hike [in March]. Of course, lower fixed mortgage rates risk reigniting the housing market."
Meanwhile net immigration continues to surge.
"On our forecasts it will reach an all-time high of 50,000 people per annum early next year," Stephens said.
"The June MPS contained an alternative scenario in which net immigration rose by an extra 4000 people per quarter.
"The recent surprise has been almost, but not quite, of that magnitude. In that scenario, the OCR had to rise by an extra 55 basis points over two years."
