No-one is expecting the central bank to lift its official cash rate (OCR) from 1.75% until next year — at the earliest in August and possibly as late as November.
Westpac senior economist Dominick Stephens said the economy had been sending out contradictory signals on monetary policy, as it often did. Growth was slowing but inflation was increasing. Those positives and negatives would roughly offset one another in the Reserve Bank’s deliberations, meaning the bank would stay on the same course it charted in May.
Thursday’s MPS will be the third under governor Adrian Orr.
In May, the Reserve Bank’s main point was employment was around its sustainable level but inflation was below target.
The balance of those factors meant the OCR would have to remain at a stimulatory level for a considerable period of time, Mr Stephens said.
The Reserve Bank’s forecasts showed an unchanged OCR until late next year and gradual increases thereafter.
However, the May MPS emphasised more heavily the OCR could move in either direction, if required by changing conditions.
"Markets interpreted that as surprisingly dovish and latched on to the Reserve Bank’s comment the next move in the OCR could be ‘up or down’."
In the June OCR review, the central bank reiterated the main messages from May and repeated the "up or down" phrase, he said.
Recent weaker GDP data was emphasised and interpreted the Government’s May Budget as less stimulatory, suggesting it thought the balance of risks had moved slightly further away from OCR hikes.
There was surprise at the Reserve Bank’s interpretation of fiscal policy, particularly given the Treasury had judged the Budget to be stimulatory for monetary policy, Mr Stephens said.
The Reserve Bank was expected to repeat its on-hold message on Thursday.
"We also expect the bank to reuse the words ‘up or down’, given the importance this phrase has attained in the mind of financial markets.
"The commentary on recent events is likely to be two-sided as positive and negative developments are discussed."
There were several areas in the economy the Reserve Bank would have to map out in detail, Mr Stephens said.
For a long while, the Reserve Bank expected the economy would accelerate in the first half of the year while Westpac expected it to slow.
The evidence had clearly "piled up" in favour of deceleration and everything from business confidence to consumer spending had slowed.
The Reserve Bank was going to have to trim its growth forecast and that would be a powerful argument against rate hikes, he said.
The Reserve Bank’s goal of 2% sustained inflation looked more attainable than it had for years.
The exchange rate had remained consistently below the Reserve Bank’s May forecast, which would help bolster inflation.
Although the central bank expected the housing market would cool, the slowdown had been more severe than anticipated.
The increase in unemployment from 4.4% to 4.5% was nothing in the scheme of things, Mr Stephens said.
The Reserve Bank’s previous judgement remained valid. Employment was close to its maximum sustainable level and the state of the labour market was a reason not to cut the OCR.
