One of the best indicators of where interest rates are heading is the Overnight Index Swap curve. For the past three months, the measure has been sinking like a stone.
By August 2011, according to the OIS, the Reserve Bank of New Zealand will have raised the official cash rate to 3.5% or 3.75%, way down on the 4.5%-plus rates the market was betting on back in May. And that was before the RBNZ started even raising the OCR.
What's changed? For a start, the U.S. Federal Reserve has sounded increasingly cautious about the outlook for the world's biggest economy. Never mind that companies in the Standard & Poor's 500 Index have posted something like 50% earnings growth in the latest financial year. The fact is the economic data has been patchy at best.
As a result, the Fed has reiterated its pledge to keep its key interest rate near zero and maintain its policy of quantitative easing - known in less rarefied circles as printing money. In New Zealand, similarly weak measures show manufacturing and services sectors coming off the boil, and the jobless rate at a 10-year high of 6.8%.
The only rogue upbeat indicator has been retail sales, which jumped to its highest level in more than three years in June. That may be partly a symptom of falling prices, especially for electronic goods. Inflation rose a smaller-than-expected 0.3% in the second quarter, when economists had been picking acceleration. The retail data series may also throw up some 'false readings' in the next two months, as some consumers bring forward purchases of big ticket items that will incur the higher rate of GST, at 15%, in October.
The other clue that interest rate increases are losing momentum is in the kiwi dollar, which has headed back down to about the 70 U.S. cents mark from as much as 73.50 cents early this month.
With no rush to raise rates, there's less incentive to hold the kiwi for its relative yield. A similar, though slightly more upbeat, pattern is occurring in Australia where the currency has slipped from a three-month high amid perceptions the RBA is in no hurry to keep tightening monetary conditions.
Not that this means a double-dip recession looms. The chances of that are remote. Australia and China combined - New Zealand's two biggest markets - are hungry for the nation's rural commodities and represent the strongest axis of growth anywhere in the world.
So the most likely outcome is a gradual recovery with two, perhaps three, increases in the OCR over 12 months.
RBNZ Governor Alan Bollard next reviews interest rates on Sept. 16, and again on Oct. 28 and Dec. 9. Already economists are divided on whether he will move in September and more than one is now using a phrase like 'take a pause'.
Net migration has been coming off the boil and that removes one of the supports for the housing market, which remains moribund. Twelve months ago, the market had been betting the economy would have picked up a head of steam by now but in reality, the recession is proving to have a very long tail.