The central bank will tomorrow release its OCR review.
Mr Stephens said he expected the overall tone of the review to be ''slightly more dovish'' than the September Monetary Policy Statement.
''Over the course of this year, the Reserve Bank has been gradually building the case for higher interest rates. Its forecasts have been steadily revised in the direction of an OCR hiking cycle beginning earlier, being greater in extent and, in its rhetoric, becoming more pointed.
''We expect the October OCR review will break with that trend. This time, the Reserve Bank may sound just a little more hesitant about hiking the OCR early, on account of the high exchange rate.''
The central bank had been grappling with three key questions which could affect the timing of a rate rise, he said.
They were. -
• What would happen to the housing market now restrictions on high loan-to-value (LVR) mortgage lending had been enacted for financial stability reasons?
• To what extent would the Canterbury rebuild and national recovery in construction activity generate inflation pressures?
• To what extent would the high exchange rate depress inflation?Mr Stephens said it was too soon for reliable information to emerge regarding the impact of LVR restrictions on house prices.
Recent developments regarding the construction boom and inflation pressure had probably bolstered the case for OCR hikes. Indicators of economic activity had been stronger than the Reserve Bank anticipated and September quarter inflation was slightly higher than forecasts.
''Importantly, there are increasing signs nationwide construction cost inflation is gathering a head of steam.''
The most important change since September was the exchange rate, he said.
The trade weighted index, a basket of currencies from New Zealand's trading partners, had risen 4% while in September, the Reserve Bank predicted an unchanged exchange rate.
The balance of risks was skewed towards a fall in interest rates. If tomorrow's review followed Westpac expectations by acknowledging the outlook for the OCR was conditional on the exchange rate, swap rates would probably fall slightly. If the Reserve Bank opts for a more extreme option, swap rates would fall sharply.
''Our own forecast, unchanged since April, has been the strength of the domestic economy would force the Reserve Bank to begin the OCR hiking cycle in March 2014. However, recent developments are starting to point to a later start date.
"Subject to Thursday's OCR review being along the lines we expect, we are likely to shift our call to forecasting an April 2014 start date to the OCR hiking cycle,'' Mr Stephens said.
