The Reserve Bank is putting its interest rate shotgun away, probably till the end of the year.
But it may try to put some more arrows in the high flying New Zealand dollar, which the central bank said could be headed for a "significant fall".
And economists warn that while the official cash rate is on hold for now, after moving up to 3.5 per cent yesterday, borrowers can expect floating mortgage rates to head toward 8 per cent.
After the central bank's latest move yesterday, the fourth move up since March, ANZ increased floating rates to 6.74 per cent, with others likely to follow suit, from about 6.5 per cent.
The next leg up in official rates could start in December or early next year, but in time the Reserve Bank is expected to take the cash rate up to between 4.5 per cent and 5 per cent.
The central bank took a shot at the high dollar yesterday which it said was "unjustified and unsustainable". The jawboning saw the currency dive more than US1c to just under US86c at the end of the day.
In May last year, the Reserve Bank admitted it had intervened in the currency market.
And in 2007 it was revealed that it sold more than $700m in currency in a single month to clip the wings of the high dollar after it peaked at peaked at more than US81c, about US5c below what it was yesterday.
Westpac Bank chief economist Dominick Stephens said yesterday's Reserve Bank statement strengthened their conviction that the central bank could intervene by selling the New Zealand dollar "any day now".
The comments that the dollar was unjustified and unsustainable with the potential for a significant fall was seen as a veiled warning of intervention, he said.
With New Zealand's terms of trade clearly worsening, it was a better time to intervene than it was in 2007, Stephens said. "The kiwi dollar is under a lot of pressure and it is likely to fall in the next few weeks, substantially," he said, with the dollar likely to average about US83c for the rest of the year, based on still relatively strong export commodity prices.
ASB chief economist Nick Tuffley said he did not think the criteria to intervene had been met. The main stumbling block was that market conditions may not be "opportune for success".
"We don't expect the Reserve Bank to intervene despite the comments, but the statement . . . should keep the New Zealand dollar heavy in the near term," Tuffley said.
There was little chance of success in further knocking down the currency when New Zealand had such a strong yield advantage with much higher interest rates than other developed countries. "The yield differential is pretty high and that's what is appealing to investors at the moment.
"When you stand out as the only central bank lifting interest rates in the developed world and you are going to lift rates again in the future, it is a clear indication of yield pickup coming," he said.
The New Zealand dollar could remain high till next year, when the United States may start to lift their official interest rates.
Meanwhile, Westpac's Stephens said by the end of 2016 the official cash rate would peak at 5.25 per cent, taking floating rates to 7.9 per cent. But the two year fixed term mortgage rate was not expected to get "much above 7 per cent" he said.
It was possible that fixed term rates could actually fall later this year.
"There is an over-reaction brewing" Stephens said, with some people thinking that the Reserve Bank was abandoning the need for further rate rises.
A drop in wholesale rates could see fixed term rates fall.
"And that would be a great opportunity to fix (for borrowers)," he said.
Tuffley said they expected floating mortgage rates to peak about 7.75 per cent.
Current fixed rates between one and three year terms look relatively low for borrowers but four and five year terms looked "a bit expensive," he said.
Reserve Bank lifts official cash rate to 3.5 per cent but rates now on hold for unspecified period
Economy expected to grow 3.7 per cent this calendar year.
Growth among New Zealand's trading partners eased slightly.
Construction was growing strongly, especially in Canterbury.
Strong net migration was adding heat to the housing market and to household demand.
But house price inflation had "moderated" further since June.
General inflation was still "moderate" but strong economic growth was soaking up spare capacity in the economy.
Source: Reserve Bank's statement