The ANZ/National Bank Market Focus this week states that the NZ market is "getting ahead of itself" pricing in rate hikes from early next year, despite mortgage paying pressure being unlikely to ease in the near-term.

"The first rate hike has been priced in from January next year, despite the RBNZ stating it expects to keep the Official Cash Rate (OCR) at or below current levels until the latter part of 2010," it says.

The banks' economists continue to predict rate hikes to be some time off and therefore favours floating rates. It adds that there are concerns a flood of mortgage fixing could be pending, but is unlikely to be significant as that seen in March.

The ASB Business Weekly also sees offshore events as the key driving force for longer-end interest rates.

"NZ longer-term interest rates continue to be indirectly dragged up by rising rates in Australia," it says. This follows the Reserve Bank of Australia's (RBA) formal move away from an easing bias to a more neutral stance. Markets there are pricing in rate hikes from the RBA by the end of the year.

ASB economists say: "The market has underestimated the RBNZ's willingness to cut further, with market pricing implying the easing cycle is over - and that the OCR will increase as early as the start of 2010. This is despite the RBNZ becoming more explicit, expressing its intention to cut the OCR further if wholesale interest rates and the NZ dollar remain elevated at current levels."

They point out that both wholesale interest rates and the NZ dollar have increased and also mention the better than expected payrolls report and surprise drop in unemployment rate seen in the US.

The BNZ Capital Markets Outlook acknowledges that domestic interest rates saw a sell-off last week as "significant offshore moves" took our yields higher, with the Australian market being the biggest mover.

"The NZ market hasn't priced RBNZ hikes anywhere near as aggressively, as the NZ economy continues to look far less buoyant, but hikes continue to be priced starting very early in 2010," it says.

The Westpac Weekly Commentary continues to favour fixing for six months to a year.

"Interest rates have bottomed and are likely to trend higher over coming years, although the RBNZ's intention to keep the OCR low suggests little pressure for short-term rates to rise any time soon," it says.