The Reserve Bank has predictably dropped the Official Cash Rate by another 25 basis points to 2.75 per cent.

And it says further interest rate cuts are likely.

But in its Monetary Policy Statement released this morning it says that it expects GDP growth to remain around two per cent despite a number of negative forces weighing on the economy.

However the Bank says that if interest rates stay low — and that will largely depend on inflation — then growth could be back to 2.5% by the end of 2016 thus presumably kicking off a more buoyant 2017, election year.  

It says unemployment will rise slightly to 6.1% next year but with the pickup in growth fall away again in 2017.

But at the same time continued migration, high tourism, low interest rates, the lower exchange rate and continued construction activity, particularly in Auckland, are all cushioning the economy against the worst of the dairy price fall and the overall global slowdown.

However it is the dairy price fall which dominates the Bank’s statement and it has undertaken a special investigation into its impact by consulting 20 organisations connected to agriculture and another 30 firms from other industries.

They found that many farmers were increasing their overdrafts, some had sold some Fonterra shares and many were likely to take up the Fonterra interest free loans being offered by the co-operative.

Otherwise farmers were looking to decrease costs and to cut back on investment.

However the Bank warned that the dairy price fall had caused confidence to fall in the economy generally and that growth in domestic spending had eased.

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“Past experience shows that falling export prices lead to lower business investment as firms worry about the prospects for future demand,” the Bank said.

But they said they expected spending on consumption to slow more gradually than investment as households used savings or borrowing to avoid pulling back sharply on regular spending.

The Bank has spent much of this year publicly worrying about the impact of rapidly rising house prices in Auckland and potential for the possible consequence of increased financial instability but for the first time it is suggesting those worries may be beginning to fade.

It says that it expects that the loan-to-value restrictions and the IRD number requirements and the Brightline test on what amounts to a capital gains tax will help to reduce the risk.

“We assume that house price inflation will ease steadily as new supply comes on stream but do not assume a sharp house price adjustment,” they say.

They say that one consequence of lower interest rates has been an increase in the proportion of mortgages taken out on fixed terms, particularly two years.

Overall, construction expenditure is estimated to have remained strong through the middle of 2015 but to have grown at a slower pace than in recent years.

Though Canterbury residential construction has peaked a year earlier than expected strong building consent numbers elsewhere was consistent with continued growth in residential building activity through the middle of 2015, it said.

Non-residential construction had also remained strong but growth in other business investment had slowed.

Overall the Banks view is less pessimistic than some might have expected.

That will disappoint Labour who have been emphasising the negative in their questions of Finance Minister Bill English in Parliament.

But the Bank stresses that there are any number of imponderables contained within the forecasts.