Governor of the Reserve Bank Alan Bollard is concerned that the recent spike in long-term interest rates reflects market expectations that are out of whack with the Reserve Bank’s, and wants them to get back on the same page.

The rates rise combined with the jump in the New Zealand dollar could hinder an eventual recovery.

Mortgage brokers and banks have been advising homeowners to lock in long term rates now, which has significantly increased demand for three to five year mortgages over the last two weeks.

This has been in response to the Reserve Bank saying rate cuts will be stopping shortly, which many have read to mean that rates will be rising again shortly – an inference not supported by the last Monetary Policy Statement on the 12th however.

"As indicated in our March Statement, we are projecting interest rates to remain at relatively low levels for an extended period", says Dr Bollard.

Overseas interest rates or swap rates have also gone up, but because the markets aren’t very liquid, the trades that have been happening are having an exaggerated effect on pricing.

The Reserve Bank also quietly thinks the markets are pricing in an economic recovery faster than what the Bank thinks in regards to rapidly rising long term inflation expectations.

The RBNZ thinks we’ll have a fairly flat economy, which will mean fairly flat inflation.

"As we said in our 12 March Monetary Policy Statement, the economic recovery is expected to be very gradual. Furthermore, the risks around the outlook continue to be weighted to the downside," says Dr Bollard.

"In these circumstances we believe the rise in longer-term interest rates is unwarranted and inconsistent with the monetary policy outlook.

The point is arguable however.

The market may well be merely processing that the amount of monetary policy and fiscal stimulus gushing into the economy is enough on its own to raise long-term inflation, regardless of the speed or strength of any recovery.

Dr Bollard says if this apparent distortion persists, it could put unnecessary pressure on the cost of borrowing by firms and households – something he is ultimately held responsible for, and doubtless not happy about.