Accelerating growth in mortgage debt is expected to fuel Reserve Bank concerns about an overheating housing market.
Over 2012 residential mortgage debt rose 3.7 per cent, the fastest rate for four years and up from just 1.2 per cent in 2011.
A sterner tone on the housing market was evident in the Reserve Bank's official cash rate announcement yesterday.
"On balance it remains appropriate for the OCR to be held at 2.5 per cent," it said - language unchanged from the previous review in December and suggesting, ANZ economist Mark Smith said, that the bank was in no immediate hurry to move the OCR.
But it added that "house price inflation has increased and we are watching this and household credit growth closely. The bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply."
That is a shift from the more sanguine tone of the December monetary policy statement which acknowledged the acceleration of house price inflation, particularly in Auckland, but said it did not expect this pick-up to substantially increase generalised inflation pressures and to peak at not much more than 5 per cent, as house prices were already "very high".
Westpac chief economist Dominick Stephens said the reference to financial stability yesterday was a direct invocation of the new policy targets agreement concluded between governor Graeme Wheeler and the Government.
"The Reserve Bank is reminding markets that it has the right to keep interest rates higher than inflation targeting alone would warrant, in order to prevent excessive lending from imperilling financial stability."
Inflation has been weaker than the bank expected and for the past six months below the bottom of its 1 to 3 per cent target band, something it largely attributes to an overvalued dollar.
ASB chief economist Nick Tuffley said that, given there was little the Reserve Bank could do about the level of the New Zealand dollar in the current environment, that indicated it would tolerate inflation currently sitting below the band.
Economists noted a subtle shift in the Reserve Bank's language about the inflation outlook.
In December the bank expected spare capacity would be "eliminated" by the end of this year and inflation would rise towards 2 per cent "gradually".
"Those key words were softened to spare capacity being 'reduced' this year and inflation rising 'slowly' towards 2 per cent," Stephens said.
Smith took them to indicate that the bank might be entertaining the possibility that more enduring influences that just the dollar might be holding down core inflation.
The Reserve Bank acknowledged that the exchange rate is undermining profitability in export and import-competing industries.
"The bank is not happy about this," Bank of New Zealand head of research Stephen Toplis said.
"But, clearly, cutting interest rates is the wrong thing to do in an environment where already-negative real mortgage rates are exacerbating the excesses of the housing market."
Reserve Bank intervention in market steps up
The Reserve Bank stepped up markedly its activity on the foreign exchange market late last year, but currency strategists do not see it as a precursor to intervention aimed at reducing the value of the New Zealand dollar.
The bank intervened in 2007 and 2008 selling a cumulative $4 billion in a bid to lower the exchange rate. It has subsequently unwound most of that position.
Apart from that its monthly activity in the forex market amounted to a net change of less than $10 million a month, by way of keeping its hand in, until November when it sold $64 million and December when it sold $199 million.
"Such sums are a drop in the bucket compared with the 32 billion kiwi dollars which, according to the Bank for International Settlements, get traded a day," Bank of New Zealand currency strategist Mike Jones said.
The Reserve Bank has quite clear conditions that have to be met before it can intervene, Jones said, one of which is that it have a "material prospect" of success - a condition it does not consider is fulfilled while major central banks are printing money on such a large scale.
The bank regards the kiwi dollar as overvalued - it said so again yesterday - and these transactions could be seen as putting its money where its mouth is, taking a position it expects to unwind at a profit when the currency corrects, Jones said.
Westpac senior market strategist Imre Speizer said: "It is not really designed to move the currency but rather to take advantage of its overvaluation. I wouldn't read too much into it yet."
But if the bank continued to sell kiwi dollars at $100 million or $200 million a month it would be fair to conclude there had been a change in behaviour and it was managing its foreign exchange reserves much more aggressively, taking advantage of the market, as the Reserve Bank of Australia has for years.
"To go further and say this is a precursor to overt intervention would be a long bow to draw," Speizer said.