The Reserve Bank has kept the official cash rate at 2.5% for two years and is widely expected to keep it at that rate until perhaps March of next year.
Westpac chief economist Dominick Stephens said that recently, the Reserve Bank's stance had started looking less like ''sitting pretty'' and more like ''sitting on the fence''.
''And that's becoming an uncomfortable place to be.''
The bank releases its official cash rate statement tomorrow and Mr Stephens said the central bank faced a tough dichotomy. On one side, the Christchurch rebuild and rising house prices had produced surprisingly rapid economic growth and could lead to inflation pressures. On the other, inflation was low, due to the high exchange rate, and the exchange rate could rise even further.
The Reserve Bank was unable to determine which side of the dichotomy was the most germane, so it sensibly opted to sit on the fence, he said.
Westpac expected the Reserve Bank to remain on the fence, but to express increasing discomfort with the risks on either side.
The final paragraph of the release could well be a verbatim repeat of the March Policy statement: ''There are both upside and downside risks to this outlook. At this point, we expect to keep the OCR unchanged through the end of the year''.
That said, the Reserve Bank's summary of the outlook would have to be updated to reflect the fact that if anything, the economic dichotomy had become starker, Mr Stephens said.
Wording around the local economy would have to become more bullish. Economic growth in the December quarter was much stronger than the Reserve Bank expected and recent survey data suggested the buoyancy had rolled on into the new year.
The link between rising house prices and consumer spending might be singled out for special mention, he said. Private consumption expenditure grew 1.4% in the December quarter, possibly signalling a return to the borrow-and-spend ways of the last decade.
The central bank would mention both the drought - which would hit agricultural production hard - and the recent 66% increase in dairy exports that would soften the blow, Mr Stephens said.
''As always, the Reserve Bank will rail against the high exchange rate.''
Given the trade weighted index (TWI) had risen to an all-time high, the Reserve Bank might invoke language associated with exchange rate intervention, labelling the New Zealand dollar ''unjustified'' and ''exceptional'' - two of the bank's four criteria for intervention.
Finally, the Reserve Bank would point out that inflation was low but expected to rise gradually towards 2%, Mr Stephens said.
