FXstreet.com (Barcelona) - The recent January OCR view revealed the Reserve Bank is getting increasingly worried about excess demand in the housing market and its implications for both monetary and prudential policy. The Bank could not have been blunter when it noted house price inflation has increased and we are watching this and household credit growth closely. “In our opinion, the excesses in this market will build further. Accordingly, this will keep the central bank firmly on a tightening bias resulting in an eventual increase in the cash rate later this year.” writes the BNZ Research Team.

According to the team, “We think that the central bank’s stance is entirely appropriate for the current economic environment. As a result, we are sticking with our pick for the first rate hike in December of this year with the risks evenly weighted between sooner and later. More immediately, we think the probability that rates will remain unchanged in March 2013 is around 80%. If there was a surprise, it is more likely to be to the upside than the down.”

Notably, our year ahead view is now not dissimilar to the market. The New Year’s run of more positive global and domestic data has seen the OIS market moved from pricing in 10bps of RBNZ rate cuts at the end of last year, to pricing around 15bps worth of hikes (over the coming 12 months). Along with January’s sizeable global bond market selloff, this underpinned the 20bps increase in NZ 2-year swap yields over the month.