The Reserve Bank's statement accompanying its Official Cash Rate review on Thursday is expected to be designed to contain recent upward movement in New Zealand interest rates, although rising offshore sentiment may limit the RBNZ's ability to actually do so, ANZ economists said.

RBNZ Governor Alan Bollard is widely expected to leave the OCR unchanged at 2.5% on July 30. But unless there is a major shift in global sentiment following better-than-expected-data out of the US, Britain and Australia over the past week, the RBNZ's ability to contain the interest rate market may come under further pressure, the economists said.

With little local data out last week, the NZ market followed offshore moves and in particular our short end has taken to largely tracking movements in Aussie's 3 year futures. A speech on Tuesday (NZ 3pm) by RBA Governor Stevens could see upside pressure being maintained in Aussie rates. On Wednesday we have building permits, which are probably about due to show timid signs of recovery, given their correlation with existing house sales, which have been steadily improving.

Generally flows in the NZ swap market have been light and flattening pressure has been the developing theme. This has been led by speculators looking to pay the increasingly risky short end (2y) while receiving the relative safety of long end (10y) where high implied forward rates provide some comfort. For example 1y out of 7y is currently 7.00 percent.

In addition, mortgage paying has been normal with 1 and 2 year the preferred maturities, while the Uridashi /Eurokiwi flows have been lighter than expected given the massive maturity profile during July. The NZ 2y swap has headed above the 3.90 percent level it had previously struggled to break and it still looks like a test of 4 percent is possible.

While there is no doubting the housing market is better, leaving the RBNZ wary, we suspect they'll try to contain the rate market's bias to rise for now. But getting follow through may prove difficult in the absence of a major shift in offshore sentiment.