Another rise in the official cash rate, to 3 per cent, on Thursday is seen as a virtual certainty. But the markets will be looking for signs that the Reserve Bank is having second thoughts about the pace and extent of monetary tightening still to come.

Westpac chief economist Dominick Stephens said the message would probably be the same as in March: The economy is gathering momentum, construction is booming, inflation pressures are building and therefore the OCR needs to rise.

The Reserve Bank made it clear earlier this year that it expects to increase the OCR by about 2 percentage points over two years.

But such projections depend on the economy evolving in line with its expectations. On a trade-weighted basis the kiwi dollar has traded between 2 and 3 per cent higher than the Reserve Bank assumed, at the same time as dairy prices have dropped sharply - by 20 per cent since early February.

ASB chief economist Nick Tuffley said the New Zealand dollar had not been performing its buffer function of falling to offset weaker export prices.

But the Reserve Bank also faced the uncomfortable reality that it was going it alone among the developed world in lifting interest rates, and that made New Zealand stand out for global investors, resulting in a risk that the dollar is stronger for longer. That risk may start to affect the bank's OCR decision beyond April.

Source and full story: NZ Herald