• The RBNZ put out a statement on Wednesday, expressing its belief that “the rise in longer-term interest rates is unwarranted and inconsistent with the monetary policy outlook”.  We agree that the lift in rates is inconsistent with the likelihood of short-term interest rates remaining low throughout 2009.  However, the lift was entirely consistent with the laws of supply and demand. 
• The rise in longer term rates was driven by the stampede to fix mortgage rates and the pressure those flows were exerted on wholesale rates as banks had to re-jig their balance sheets. 
• The episode has revealed a practical dilemma for the RBNZ.  It is reluctant to cut the OCR too much further, yet market reaction to this changed perception was one catalyst for higher mortgage rates.

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