RBNZ turns hawkish

The Reserve Bank of New Zealand turned surprisingly hawkish in its quarterly monetary policy statement, indicating it would have acted more immediately on removing monetary stimulus if markets didn't do the same on their own.

"Recent tightening in financial conditions, driven by a higher exchange rate, increased long-term interest rates and a wider gap between the OCR and bank funding costs, reduces the need for immediate action," the RBNZ said in what was probably the crux of the recent statement.

In another major change in language, the RBNZ said "if [the] economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010." This differed from the previous OCR statement, in which the central bank said it expects to keep the OCR at the current level until the second half of 2010.

Governor Alan Bollard was quick to admit the RBNZ is being less explicit about the direction of policy now, as economic conditions are slightly stronger than before. "We are in a situation where the financial markets can make up their minds about how and when tightening takes place. We are being a little less explicit about it now," Bollard said.

The RBNZ statement appeared optimistic on the local economy that was the result of improved world outlook, higher export commodity prices and increased house prices.  But it stopped short because tighter financial conditions are already prevalent in the market. Supporting the RBNZ's move to leave the OCR unchanged was its inflation outlook, where it expects inflation to remain within the target band.

A rate hike would only encourage banks to raise mortgage rates, just when Bollard suggested he was less concerned about the current levels of rates.

"The current rates reflect increase in cost of funds, which are ostensibly high," due to higher rates in the retail and international markets, Bollard said.

RBNZ has noted that borrowers have shortened the duration of their loans as short-term rates are low and if the OCR were to be hiked, it would quickly translate to higher rates very quickly. And with RBNZ's key concern being whether higher house prices would translate to increased consumer spending, Bollard is not willing to exacerbate his concern with an OCR hike adding to mortgage rates, which he suggested was appropriate now.

Average mortgage duration has reduced to just over 12 months in the past two years, from 20 months before.