Foreign-exchange traders are betting Reserve Bank Governor Alan Bollard will abandon his promise to keep interest rates at a record low. Bollard has hit back, saying the markets have difficulty accepting the fact interest rates can stay stable and they are frequently wrong.

But the evidence for a shift is compelling. With the Kiwi dollar appreciating rapidly, money markets are picking Bollard will have to act. David Tien, from Fischer Francis Trees & Watts in New York says “NZ may surprise people as one of the first central banks to tighten.”

An index compiled by Credit Suisse shows Interest-rate swaps indicate policy makers will raise borrowing costs by 1.18 percentage points within 12 months. NZ consumer spending as measured by retail sales rose 0.4% in the three months ended June 30, the first gain in seven quarters. House prices rose for a third month in July, raising expectations the nation’s worst recession in 30 years is over and improved business confidence provides more evidence.

In July Bollard said the overnight cash rate will stay at 2.5% or move lower until the latter part of 2010, but the optimistic numbers have come since he made his comment. Dale Thomas, head of currencies at Insight Investment Management in London says the RBNZ panicked at the beginning of the year when it slashed rates. The circumstances have changed. NZ is out of the recession. The RBNZ is more likely to surprise the marketplace by putting rates up sooner than later.

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