The case for higher interest rates gained more weight today after subtle shifts in the Reserve Bank's language were interpreted as being more hawkish - or tougher on inflation - than its previous stance.
As expected, the bank left its official cash rate unchanged at 2.5 per cent - where it has been since March 2011 - but changes to the wording of the bank's monetary policy statement, along with alterations to its forecast interest rate track, brought it more line with the market's view on where rates will go in 2014.
Reserve Bank Governor Graeme Wheeler said rapid house price inflation persisted in Auckland and Canterbury.
"As has been noted for some time, the Reserve Bank does not want to see financial or price stability compromised by continued high house price inflation," he in a statement.
"The extent and timing of the rise in policy rates will depend largely on the degree to which the momentum in the housing market and construction sector spills over into broader demand and inflation pressures," Wheeler said.
The New Zealand dollar rallied by half a US cent immediately after the statement's release. By midday, the currency had gained more ground, trading at US81.49c from US80.80c just before the 9 am release of the Reserve Bank's statement.
"Compared to the June statement it is clearly a bit on the hawkish side - or less dovish - in the sense that they have brought forward the timing of where they see the official cash rate going up from Q3 next year to Q2," Bank of New Zealand economist Doug Steel said.
Steel said the gap between Reserve Bank's expectations and the market's had closed somewhat.
He said some leading indicators, the higher dairy cash payout, a big swing in net migration, and stronger house prices, suggested that monetary conditions needed to tighten next year to help offset their likely impact on inflation.
Westpac said the main surprise was a more explicit description of the start date for tightening and a significantly elevated 90-day interest rate projection, which implied a tightening start date of April next from July previously.
"We think the market was positioned for a neutral outcome, expecting the LVR impact uncertainty to be emphasised," Westpac said.
The Reserve Bank said it expected the introduction of LVR restrictions to help to slow house price inflation.
In his assessment of broader conditions, Wheeler said the global economic outlook remained mixed.
Economic growth in Australia and China had slowed and some emerging market currencies had come under downward pressure.
At the same time, the major developed economies continued to recover and New Zealand's export commodity prices remained very high, he said.
"Although long-term interest rates have risen globally in recent months, largely due to uncertainty around the timing of the Federal Reserve's exit from quantitative easing, global financial conditions overall continue to be very accommodating," he said.