Reserve Bank Governor Alan Bollard delivered an on-the-record speech last week as part of the Reserve Bank's campaign to manage inflation expectations through public communication rather than lifting interest rates says ASB Business Weekly.

J. P. Morgan Weekly Prospects says Bollard warned against households and businesses increasing margins and wages in response to the forthcoming GST hike.

"He said doing so would worsen inflation, forcing the Reserve Bank's policy tightening hand more than would otherwise be the case."

Westpac Weekly Commentary says the Reserve Bank's forecast for inflation to remain "comfortably inside the target band in the second half of our forecast horizon" is a conditional one, which relies on the Reserve Bank delivering the rate hikes they have projected.

Westpac says in the June MPS those projections pointed to a peak Official Cash Rate (OCR) of close to 6% and the July review hinted at something less.

"But we would be staggered if the Reserve Bank has taken its projections down to anything like the 4% peak that the market is now pricing."

BNZ Markets Outlook says the market is now pricing approximately a 30% to 40% chance of a September hike, with just 50 basis points of hikes now priced through to the middle of 2011.

It says the Governor's speech fed market predilections by betraying an increasing sense of doubt.

"Doubt about the recovery seeing it now as fragile and vulnerable when the view of the June Monetary Policy Statement (MPS) was that growth was "becoming more broad based" and doubt about further OCR increases by the look of the sub-text."

ANZ Market Focus says longer-term global interest rates have continued to drift lower as global concerns remain front and center on the part of investors.

It says while a weaker US economy is not good news for global growth there are compensations.

"Already, cuts to two-year mortgage interest rates have contributed significantly improving home affordability by one measure."

BNZ Weekly Overview economist Tony Alexander says looking ahead BNZ thinks a lot of the change in monetary policy expectations has now been factored into the curve and scope for further declines looks fairly limited.

He says the curve is quite vulnerable therefore to three things.

First, a switch back in global expectations toward hopes of early policy tightenings if economic data surprise on the upside.

Second, a risk that with the gap between floating and fixed rates now so much less than in recent months we will see a move by borrowers to fixed.

Third, if business credit demand improves in the near future the resulting increase in demand for quite attractive fixed rates could elicit a quick market pricing response.

He says at this stage BNZ still expects another rise in the OCR to come on September 16.