KEY POINTS:
Reserve Bank Governor Alan Bollard yesterday delivered the interest rate rise he foreshadowed in January accompanied by a monetary policy statement which threatens there's more to come.
The increase in the official cash rate to 7.5 per cent from 7.25 per cent, where it had sat since late 2005, came with forecasts that show 90-day wholesale interest rates at levels that imply a further increase in the OCR.
And the central bank is forecasting inflation - even with yesterday's rate increase factored in - still uncomfortably close to the top of its 1 to 3 per cent target band.
The Reserve Bank sees inflation pressure at every turn: in a buoyant housing market, in a tight labour market, in the stimulus to the export sector from high commodity prices, in the banks' willingness to lend on very low margins to a household sector eager to borrow, and in the Government's expansionary fiscal policy.
"Our concern is that the recent pick-up in housing and domestic demand may gain momentum, giving rise to a stronger cyclical upturn at a time when resources are already very stretched."
Yet despite the hawkishness of the statement, the money markets reacted initially by loosening monetary conditions - sending the kiwi dollar almost 1c lower against the US dollar, though it recovered a little and was trading at over US68c by late yesterday.
And by the end of the day the interest rate market was pricing in a 22 per cent chance that the bank would raise rates again in April, based on Credit Suisse's swaps-based indicator.
Economists said the bank's message had been clouded, even undermined, by Bollard's raising the issue of alternative measures to support the OCR.
That was seen as signifying a reluctance to raise the OCR again, even though Bollard was explicit that it would remain the primary tool of monetary policy.
"It smacks of 'I'm raising interest rates. Sorry'," Westpac chief economist Brendan O'Donovan said.
But he believed the market had over-reacted. "He has still said inflation is at the top end of the target band in the medium term and all the risks are to the upside, and strongly expressed that he has no tolerance to upside surprises."
While he thinks another rate increase in April is very unlikely, O'Donovan puts the chances of one in June at 40 or 45 per cent.
One key argument against raising rates was fading fast as the exchange rate fell, he said.
ANZ National Bank chief economist Cameron Bagrie said yesterday's decision was consistent with the inflation risk and with what the central bank had said before.
"It is prudent to raise rates and flag one more."
But it was puzzling that Bollard had raised the issue of supplementary measures to target the housing market in a monetary policy decision. "It signals a bit of reluctance to raise rates further."
Bank of New Zealand's head of research Stephen Toplis said, "We find it very frustrating that the Reserve Bank has clouded what could have been a very clear message with all these add-ons. We still believe the bank is much closer to tightening again than the market cares to believe."
Bollard told MPs on the finance and expenditure committee that the housing market was his main concern and its strength continued to surprise the bank's forecasters.
The Reserve Bank has revised up its house price inflation forecasts substantially - to still be at about 5 per cent by the start of next year, compared with the 2 per cent fall it was expecting in its December statement.
The Auckland Chamber of Commerce, the Employers and Manufacturers Association and the Council of Trade Unions all condemned the OCR increase.
