Goldman Sachs JB analyst Philip Borkin says he now expects the first RBNZ Official Cash Rate (OCR) hike to be in the third quarter and for the pace of tightening to be more gradual.

"We believe the RBNZ's new bank liquidity policy has delivered a proxy tightening, contributing to a slowing in housing market momentum.

"Potential changes to the regulatory and tax backdrop should also finally provide the RBNZ with a helping hand."

The RBNZ's new liquidity policy for registered banks requires that they fund a greater portion of their balance sheets via retail deposits or from wholesale sources with greater than 12 month maturities.

As a proportion of total New Zealand dollar funding, retail funding for banks has risen to 65% from 59% a year earlier, and with a limited pool of domestic savings, this increased competition has pushed up retail deposit rates, and in turn lifted borrowing rates.

After a "housing mini-boom" through 2009, underlying momentum has slowed abruptly and the flood of new listings suggests house prices will face downward pressure over this year, Borkin says.

Other weak cyclical data includes consumer spending caution and subdued credit growth, with de-leveraging a dominant theme. Central bank requests to government for property tax changes look likely to be delivered, along with personal and GST tax changes.

"This is taking the pressure off the RBNZ to pull the OCR lever," says Borkin.

"As a result the New Zealand dollar is facing headwinds against the Australian dollar, and should assist with economic rebalancing. This is encouraging."

The kiwi dollar sank to a nine-year low against the currency of Australia, New Zealand's biggest market for exports and tourists this month and traded at 77.64 Australian cents today. The weak local dollar is set to provide a critical source of support to the tourism and manufacturing sectors.

Against this, Borkin says growth in the fourth quarter of 2009 and consumer prices in the first three months of this year may both print stronger than the RBNZ's expectations, while administrative price increases will provide it with little inflation headroom.

At the same time, the RBNZ may be too optimistic with its 2010 economic growth expectations.

"The RBNZ has the ability to absorb any near-term surprises given recent data highlighting weak cyclical momentum for 2010 to date," he says.

"We also feel the RBNZ has a greater ability to wait to assess underlying trends given that it should achieve more traction when it does come to hike, given a shortening in the duration of borrowing."

"The risks between a July or September start are reasonably balanced in our eyes and ultimately the data will be the determining factor," Borkin says.

"Nevertheless, we have leant towards September for the first hike given our views of sluggish cyclical momentum."