The ASB says it is "gobsmacked'' by the apparent lack of action by the Reserve Bank to deal with New Zealand's housing problems.
Chief economist Nick Tuffley said yesterday inflation was going to sit below 1% for two years, the longest period outside the numerical inflation target range of 1% to 3% since inflation targeting began in New Zealand.
But, with the Auckland housing market taking off again, and the rest of the country following, the Reserve Bank appeared "very reluctant'' to cut the official cash rate (OCR) much further.
The OCR is 2.25% and, until recently, most forecasters were predicting a cut in August to 2%.
"Instead, the Reserve Bank is putting the flexibility of the inflation target through moves that would hospitalise a circus contortionist, a stance reinforced in last week's housing speech from deputy governor Grant Spencer.''
It was clear the central bank was taken aback by how swiftly the Auckland housing market shook off both the Auckland investor loan-to-value restrictions (LVR) and the Government's investor tax changes. There was also greater wariness about what was happening beyond Auckland, Mr Tuffley said.
The ASB was not expecting the Reserve Bank to announce implementation of a fresh housing-lending restriction in last week's speech.
"But we were gobsmacked by the apparent lack of urgency in the speech to take macro-prudential action. The Reserve Bank is talking about a timeframe of putting into place new restrictions by the end of the year and is `closely considering measures that could be progressed in the coming months'.''
If the risks were large enough to hold back the central bank from cutting interest rates, then the Reserve Bank needed to act to counter those risks sooner than later, Mr Tuffley said.
BNZ senior economist Craig Ebert said if the Reserve Bank was to maintain strict faith in its approach, then it should be cutting its OCR, and by at least 1%.
An alternative way of looking at it was the Reserve Bank had already eased too much, stoking imbalances that would ensure New Zealand's next economic downturn.
"While the tension between these differing views has been brewing for a while now, it is now coming to a head.''
Attention would be paid to tomorrow's speech by Reserve Bank assistant governor John McDermott to indicate which way the bank was leaning.
However, yesterday, the bank sent notification the presentation would not include discussion or guidance about forthcoming OCR decisions by the Reserve Bank.
That could mean waiting until the August 11 monetary policy statement to catch the drift of the bank, Mr Ebert said.
"That would be disappointing. In particular, John McDermott's speech - on the OCR decision-making process - was to have been very closely watched by market participants for any comment either condoning or rejecting current market pricing.
"In our opinion, irrespective of the written content of the speech, it provided an ideal opportunity for the Reserve Bank to restate that it has an easing bias and that the strength of the currency is adding to the pressure to ease.''
The bank's silence, on this occasion, would serve only to push the currency higher and market pricing of a rate cut even lower.
Unless the Reserve Bank steadfastly believed the current significant tightening in monetary policy was to be welcomed, it was playing a dangerous game with its ongoing silence, Mr Ebert said.
The BNZ had pencilled in a 1.1% increase for June's Food Price Index, due tomorrow - a smaller lift than usually occurred in early winter.
June's ANZ job ads, scheduled for Thursday, seemed well overdue a technical correction, after a rare four-month run of gains.
As for Thursday's BNZ-BusinessNZ Performance in Manufacturing Index, it could give up a point or three from its strong May reading of 57.1 and still be consistent with a "decent bounce'' in second-quarter manufacturing GDP.
