Reserve Bank Governor Alan Bollard signalled yesterday that he expects to start raising interest rates in December and the subsequent track will be steeper than the markets had expected.

Where six weeks ago he talked of the official cash rate being on hold "for some time" it is in now on hold "for now".

The bank's projected track for 90-day interest rates has the first hike pencilled in for the December quarter and a cumulative 2 percentage points by the end of next year.

As ever this will depend on the flow of economic data and Bollard emphasised that, with half of all mortgage borrowers now on floating rates, he could afford to be patient, confident OCR hikes would be felt more quickly than when the bulk of mortgage debt was on fixed rates.

"There is less of a lead time and if and when we need to increase it, it will have a faster effect," he told MPs on Parliament's finance and expenditure committee.

The dollar jumped half a cent against the US dollar on the news - an over-reaction, Bollard said.

For households or businesses chasing the consumer's discretionary dollar there was little cheer to be found in the bank's forecasts, at least in the near term.

Mortgage rate rises will be sooner and swifter than they might have thought.

But most of the economic recovery underpinning that will, at first, be confined to farmers enjoying record high export prices and to the building trades once the huge task of rebuilding Christchurch gets under way.

The bank forecasts the economy to expand 4.4 per cent in the year to next March. But that is from a weak base, where per capita gross domestic product remains near its recessionary low and back where it was in 2004.

A key judgment call the bank is making is that households will continue to focus on whittling down the legacy of debt from the last boom, resulting in consumption growth of less than 1 per cent a year over the next three years when adjusted for population growth.

House prices are expected to increase only modestly, reflecting a starting point of overvaluation of up to 10 per cent as well as continuing wariness of debt.

Consumer price inflation is also forecast to be well behaved - well within the 1 to 3 per cent target band once the effect of the GST increase and other Government policy moves drop out of the annual numbers by the December quarter.

This element of the bank's forecasts has raised eyebrows among some market economists.

It rests on three linked assumptions.

One is that construction costs inflation will be about 5 to 6 per cent a year, well below the 7 to 10 per cent rates prevailing in the mid-2000s construction boom.

Another is that households will continue to focus on reducing debt and the third is that the recent spike in inflation expectations will prove short-lived.

The risk is that after several years' slump in residential construction the sector has lost capacity and will struggle to cope with the combination of rebuilding Christchurch and pent-up demand elsewhere, including Auckland.

That could result in house price inflation, higher rents, and construction costs inflation, said Bank of New Zealand head of research Stephen Toplis.

And there would be the risk that higher house prices would encourage a return to the bad old ways of equity withdrawal and consumption growth.

All of which would require the Reserve Bank to tighten more aggressively.

Toplis said he was not saying that scenario was the most likely, only that it posed a risk to the bank's benign inflation outlook.

Westpac chief economist Dominick Stephens said: "We are taking the Reserve Bank at its word regarding the start date for hikes [December], and we concur that a steep series of hikes is needed in 2012."

But he differs over the outlook for rates in 2013 and beyond.

"We are concerned that a growth spurt over the next few years, fuelled by reconstruction activity, high commodity prices, and the low starting point for interest rates, could provoke more inflationary pressure than the bank is allowing for," Stephens said.

"Under these circumstances, we are very sceptical that the 90-day rate would peak as low as 5 per cent."