Brian Fallow: Wheeler yanks the leash

While the Reserve Bank has been lifting the OCR, the funding costs for the banks have actually been falling - so and so have their rates. Photo / Dean Purcell

The Reserve Bank's monetary policy statement this morning could be seen as a bid to yank the financial markets' leash in the direction of higher wholesale interest rates.

The bank's projected track for short-term wholesale interest rates is only very marginally lower than it produced at the start of the current tightening cycle in March.

That track is, as ever, conditional on the economy obediently conforming with the bank's current expectations - on migration, export prices, the housing market, construction activity and the exchange rate in particular.

But the central bank's view of what the information to date implies is more bullish on growth and more hawkish on inflation and therefore interest rates than the financial markets' pricing of late has implied.

The forecasts still imply a cumulative 200 basis points, or 2 percentage points, of official cash rate increases by the end of next year - only 75 points of which has been delivered so far, including this morning's universally expected rise to 3.25 per cent.

Another rise in the OCR at the next opportunity in July remains a live possibility.

Governor Graeme Wheeler's problem is that while he has been raising the official cash rate, banks' actual funding costs have been falling and so have the rates at which they offer fixed-term mortgages two and three years out.

While much of that reflects international factors beyond his control, he can influence one element of it - expectations of what he will do at the short end of the interest rate curve going forward.

And the message today remains that economy is growing strongly - around 4 per cent - and that is not a rate that can be sustained without inflation becoming a problem, undermining competitiveness and eroding real incomes.

See today's full Reserve Bank Monetary Policy Statement here: