The unemployment rate is 5.2 per cent at a time of record net immigration and rapid labour force growth.
Are there really a lot of constructive things that could be happening that aren't happening because, at multi-decade lows, the cost of credit is still too high?
The latest NZIER quarterly survey of business opinion suggests not: only 5 per cent of firms cited finance costs as the factor most limiting their capacity to increase output. But 14 per cent cited labour shortages.
In an ideal world, monetary policy should be run with a view to stabilising the economy, keeping it on an even keel.
The greater risk to economic stability at the moment is not that consumer price inflation is persistently weak, but that house price inflation is persistently strong -- a rapidly expanding bubble in and near the city where a third of the population lives. In that context lower interest rates make a bad situation worse.
Nevertheless, governor Graeme Wheeler may feel he has no choice but to cut the official cash rate.
The Reserve Bank Act says the economic objective of monetary policy stability is the general level of prices. It does not say consumer prices.
But the policy targets agreement agreed between the governor and the Minister of Finance does. It says his target is to keep annual increases in the consumers price index (CPI) within a 1 to 3 per cent band on average over the medium term.
Watch: The Economy Hub: Govt must move on housing:
CPI inflation is 0.4 per cent. For the first 12 years of the inflation targeting regime, that would have been perfectly PTA-compliant. But in 2002 the bottom of the target band was raised to 1 per cent.
Inflation has now been below the bottom of the band for seven straight quarters, which is stretching the elasticity of "medium term" a bit. The worry is that this undermines the bank's credibility and by lowering inflation expectations could become self-reinforcing.
And then there is the dollar. The exchange rate has lately been running significantly higher than the bank's forecasts assumed, and with tradable goods making up nearly half of the CPI, that puts further downward pressure on the headline inflation rate. Tradables prices fell 1.5 per cent in the year to June and have been in deflationary territory for four years.
But the idea that the Reserve Bank can dial up whatever exchange rate it wants by tweaking the official cash rate is deluded.
More than $100 billion changes hands on the foreign exchange market every day, on average. That is a lot of cats to herd.
[Cutting the cash rate] will dump a monsoon bucketful of petrol onto the fire raging in the housing market.
What is happening in the other 99.8 per cent of the global economy, about which no one in New Zealand can do a blessed thing, is pretty material to the exchange rate, and often unhelpful.
Right now it is a world awash with cheap money.
It is a world in which 10-year bonds issued by the Japanese and German governments are trading at negative yields. Investors are saying "Never mind any interest, we will be happy just to get most of our money back in 10 years' time." This is not a healthy sign.
The Bank of New Zealand's head of research, Stephen Toplis, says the strength of the kiwi largely makes New Zealand a victim of its own success. "New Zealand simply looks a better place to store your hard-earned cash than just about anywhere else in the world, so folk keep buying New Zealand dollars."
The Reserve Bank, Toplis says, can't do much about this, any more than it can do anything about the fundamentals of supply and demand in the housing market.
The bank this week announced a further tightening of the macro-prudential screws. From September 1 it will require investors buying residential properties to have a 40 per cent deposit (up from 30 per cent in Auckland and 20 per cent nationwide) and require a higher proportion of owner-occupier borrowers nationwide to put up a 20 per cent deposit.
Restricting access to credit as the latest LVR curbs do, may be justified from a financial stability standpoint.
The most that might be said of that is that it mitigates the negative side effects on bank balance sheets of increasing the dose of the drug of lower interest rates.
The impact on house price inflation is likely to be pretty marginal, the bank reckons, reducing it by 2 to 5 percentage points over the next year or so from what it would otherwise be.
It is better than nothing but has to be seen in the context of annual house price inflation, as measured by Quotable Value's index, of 13.5 per cent nationwide and 16.1 per cent in Auckland.
And that is before any impact from lower mortgage rates if the OCR is cut to 2 per cent next month.
The policy targets agreement, essentially the governor's employment contract, says that in pursuing its price stability objective "the bank shall have regard to the efficiency and soundness of the financial system ... and seek to avoid unnecessary instability in output, interest rates and the exchange rate."
Restricting access to credit as the latest LVR curbs do, may be justified from a financial stability standpoint.
But cutting the cost of credit, as the markets expect it to do on August 11, fails the test of avoiding unnecessary instability in output by further inflating a housing bubble and thereby increasing the economy-wide grief that would ensue if it, or when, it bursts.
