Reserve Bank treads fine line on interest decision

The Reserve Bank is set to walk a fine line between controlling inflation and hastening economic slowdown when it releases its monetary policy statement on Thursday.

Economists expect the bank to leave its official rate unchanged at an already high 6.75 per cent.

After seven increases over the past year, which have coincided with a strong dollar, the bank is already standing on the economy's brakes.

But economists do not expect the high currency/high interest rate environment to result in a "hard landing" for the economy.

They say the central bank will be anxious not to give the markets any hint that it may now be thinking "enough is enough", as that may lead to lower, market-led rates.

"We do expect the official cash rate [OCR] to remain unchanged, but the Reserve Bank is evidently still more nervous about inflation than it is about unnecessarily exacerbating the economic slowdown," Westpac chief economist Brendan O'Donovan said in a commentary.

"Assuming the OCR remains on hold, the accompanying statement will have a scorching tone to try and keep those rogue traders under control," O'Donovan said.

Last week's National Bank survey showed business confidence in May was at its lowest point in 17 years. This followed data showing weaker than expected retail sales, numbers of dwelling consents, and wage growth over the first quarter.

Credit growth continued apace, however, and the Budget was expected to stimulate the economy.

Deutsche Bank NZ chief economist Ulf Schoefisch said the likelihood of a "hard landing", or recession, was low.

"We have gone through a lengthy period where the economy has surprised on the upside, but I think that is swinging around," he said.

"Interest rate pressure is gradually increasing as people have to refinance mortgages at higher rates." Exporters face the daunting prospect of currency hedges running out.

"Clearly the risks are on the downside. If the Reserve Bank decides to tighten again then that would exacerbate that problem," Schoefisch said.

"The Reserve Bank has put so much pressure on the system. Perhaps they ought to be patient now to see that feed through, rather than react to past data and continue to tighten."

UBS economist Robin Clements said the impact of the high currency had been dulled by successful currency hedging policies, high commodity prices and ongoing strength in the real estate sector.