"What this review is about is the tone of the statement which we expect will be balanced. In essence, the New Zealand economy is still sandwiched between two opposing forces. Until one of these forces dominates the other, the Reserve Bank (RBNZ) will be in a holding pattern."

The bank says some of the upward forces are:

• The NZ economy is strong. Growth is just under 4% on an annual average basis well above trend. While growth is slowing, the output gap remains positive ¡V around 1%.
• The labour market is tight. Some sectors in the economy are constrained by resources the labour market is one of them. Labour market tightness provides a risk for the inflation outlook.
• {Inflation is near the top of the band. Inflation has been consistently above 2.5% for a year. Inflation at this level isn't a major concern for the RBNZ, but inflation rising from this base is. Also, if inflation stays at the top-end of the range, inflation expectations may drift up also a factor the RBNZ is unlikely to want to occur.
• {A strong housing market is providing an upside risk to the growth and inflation outlook.

Some of the downward forces are:

• War. A war in Iraq, in particular if prolonged, can change everything. By waiting now the RBNZ is in a prime position (with interest rates around neutral) to react if necessary. On the other hand, if they move rates now they run the risk of having to take back any move and reducing their credibility.
• {The rising exchange rate. The sharp rise in the New Zealand dollar has caused the market to demand rate cuts. "The Reserve Bank shouldn't react to the exchange rate in such a simple manner (such as an MCI framework); they should wait for the impact of the economy's reaction to the exchange rate instead. This transmission takes time and the impact of the exchange rate on the economy is uncertain."

The National Bank says that the market will look for a statement regarding the impact of the firming currency on monetary policy.

"However, the Reserve Bank should not, and will not ignore the strong domestic economy or non-tradeables inflation pressure in its assessment. This should leave the statement balanced and does not tie the RB's hands heading into the March decision," it says.