The Reserve Bank will on Thursday release its Official Cash Rate review. Westpac chief economist Dominick Stephens called the review ''walking a fine line''.
''We doubt the Reserve Bank will alter its `on hold' stance for the OCR, for fear of stoking the overheating housing market,'' he said.
However, Mr McIntyre said changes were needed to the way banks were lending ifNew Zealand was to avoid deflation, where industrials and corporates held off making decisions on investment because they believed interest rates would go down.
''They have money sitting there, doing nothing, in the belief things will get cheaper. Japan is a great example of deflation. It is in a '20-year funk' which is so hard to get out of.''
Banks were comfortable lending to those people wanting to buy property, Mr McIntyre said.
But people wanting to establish a business, or establish a strong business ethic through expansion, were finding it much more difficult to borrow.
Asked about New Zealand retail banks advertising they were lending to business, Mr McIntyre said the banks were lending to the ''bigger end of town''.
''New Zealand is full of small and medium-sized businesses [SMEs], whose owners are forced into the default position of increasing their mortgage or putting their personal property up as security.''
The Reserve Bank needed to review its inflation targets and if it wanted 2% inflation, it then needed to make changes to the lending ratio of retail banks, he said.
There should not be a return to lending 95% of funds for property purchases, just because banks were looking for a safe return of capital and interest.
Mr McIntyre agreed that some banks had been hurt by the global financial crisis and, therefore, were cautious in their lending. But he challenged them to take on more risk themselves for the benefit of the New Zealand economy.
Mr Stephens said the Reserve Bank confirmed late last year its ''on hold'' stance for the OCR. Reducing the OCR from its present 2.5% was not discussed.
Equally, the forecasts implied that any OCR hikes were a long way off, and would be modest.
''For the first OCR review of 2013, we expect the Reserve Bank will repeat the main themes of that story. But recent low inflation and the high exchange rate mean the details of the press release will probably be more dovish.''
That may involve softening the comment on inflation - perhaps to something like ''inflation is now expected to rise towards 2% more gradually than previously assumed'', Mr Stephens said. Inflation was just 0.9% for 2012, compared with the Reserve Bank's forecast of 1.2% That was the sixth consecutive inflation outcome below the Reserve Bank's expectations and, once again, the surprise was low prices for internationally tradeable goods and services.
The constant direction of those surprises hinted at some change in the economy's structure that could keep tradeables inflation subdued for some time yet, he said.
''The Reserve Bank will also mention the exchange rate has risen even further since December, further dampening the inflation outlook. Global economic and financial market conditions are such that the New Zealand dollar may go higher still over coming months and the Reserve Bank may fear as much.''
Low inflation and the persistently high exchange rate had prompted Mr Stephens to alter his own interest rate forecasts from his previous forecast of September and he now expected the OCR to remain at 2.5% until December this year.
Other bank economists have pushed out their forecasts for the first rise in inflation to March and, in one case, June of next year.
Mr Stephens said Westpac's long-held view had been that the buoyant housing market and the Canterbury rebuilding would provoke greater inflationary pressures than the Reserve Bank current anticipated, requiring tighter monetary conditions.
''It now seems the high exchange rate is set to provide more of the necessary monetary tightening, leaving less work for interest rates,'' he said.
Definition of deflation
A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment, since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.
