Westpac chief economist Brendan O'Donovan said the combination of uncertain economic conditions, the potential impact on confidence from South Canterbury's failure and earthquake, would prompt the Reserve Bank "to take a breather in the tightening cycle", when it delivers its monetary policy statement on Thursday "The economic data has given mixed messages about the pace of the domestic recovery, and the global picture has become, in the words of the [US] Federal Reserve chairman, "unusually uncertain".
"The failure of South Canterbury Finance and the severe earthquake in the Canterbury region go further towards making a pause a tactful move, but the die was probably cast even before those events," Mr O'Donovan said in a statement.
However, Mr O'Donovan cautioned this week's hold would be only a short break within the Reserve Bank's long-stated plan to return rates to more normal levels as the economy recovers.
Its previous statement in June indicated this could mean an official cash rate as high as 6% by the end of 2012; from a starting point of 2.5%.
"That's a lot more tightening than the Reserve Bank has ever had to signal in any previous cycle," he said.
ASB economist Christina Leung said the focus of Thursday's statement would be how long the Reserve Bank intended to keep the "pause button" pressed on the OCR.
"The Reserve Bank will still have assess the likely path of inflation for the next two to three years, and interest rates will still rise eventually," she said in a statement yesterday.
Mr O'Donovan said the New Zealand economy was coming from a lower starting point than thought as GDP grew by 0.6% in the March quarter, compared to the Reserve Bank's estimate of 0.8%.
The Reserve Bank assumed 1.1% growth in the June quarter, which at the time was much higher than market forecasts, and even now it was not clear that figure was achievable, he said.
"We've seen strong growth in retail sales, wholesale trade and construction, but manufacturing sales were surprisingly weak, and drought conditions earlier in the year thumped dairy output for the quarter," he said.
Internationally, the global economy was looking more precarious.
"It's not all bad news, with second-quarter growth turning out much better than expected in Australia, Germany, the UK and Southeast Asia.
"But there are clear signs of, at the least, a mid-cycle slowdown in the United States, Japan and China, and Europe is still far from resolving its sovereign debt concerns," he said.
