Australia this week paused after hiking its official cash rate six times to 4.5 percent, but New Zealand will likely start raising its rate next week.
New Zealand's official cash rate has been 2.5 percent since April 30, 2009 and the New Zealand Manufacturers and Exporters Association (NZMEA) is urging the Reserve Bank of New Zealand (RBNZ) to hold off increasing it until September.
"A rate rise now would pose significant risks to the tradeable economy, which is already suffering through the lack of profitability caused by an overvalued currency," NZMEA chief executive John Walley.
But economists are pretty sure the RBNZ will increase the official cash rate to 2.75 percent when it releases its monetary policy statement on June 10. The market is indicating an 80 percent chance of a rate rise.
It is still a fine call. There is evidence the New Zealand economy is recovering and the Government's recent budget is stimulatory in the short-term.
Increases in the tobacco tax, ACC levies, the goods and services tax and the implementation of the Emissions Trading Scheme will drive headline inflation higher.
The central bank can "look through" first-round effects, but two-year ahead inflation expectations continue to edge toward the top of the RBNZ's target band of 3 percent.
Still, the recent developments in European markets will have thrown a slight spanner in the works, Westpac said.
Economists are starting to factor in weaker growth for economies more directly exposed to the European sovereign debt crisis.
ASB says the euro-zone problem represents lower trading partner growth for New Zealand and also causes disruption to credit markets, increasing funding costs.
"The inflation and activity outlooks suggest the RBNZ should go ahead with rate hikes. However, with the current uncertainties stemming from the euro-zone the RBNZ's gut feeling may be no," ASB said in a preview.
ANZ economists said the strengthening, though patchy, economic outlook necessitated that the RBNZ start removing policy stimulus.
"At present the decision seems relatively clear but if we see considerable market ructions in the lead-up to next Thursday, the decision will likely be a line ball call. Such is the nature of markets at present," ANZ said.
Deutsche Bank economists said the strong likelihood of a hike next week was signalled in the statement accompanying the bank's April official cash rate review and reinforced in a speech given by Governor Alan Bollard on May 5.
"Since then, whilst global markets have reflected investors' sense of increased risks to growth stemming from the indebtedness of several countries in Europe, most other developments suggest that the outlook for domestic growth is in fact somewhat stronger than had been assumed previously."
The question will then be how quickly and how far will the RBNZ raise rates.
"We expect the RBNZ will again record its expectation that the official cash rate will likely not need to rise as far in this cycle as it did in the previous cycle," Deutsche Bank said.
The NZMEA's Mr Walley said: "If the official cash rate is raised prematurely we are likely to end up in the same destructive cycle we experienced prior to the economic crisis of an overvalued exchange rate stifling our traded sector and fuelling unsustainable growth in the domestic sector".
