Acting Reserve Bank governor Grant Spencer has spent most of the past 40 years working at the Reserve Bank, as well as stints at the International Monetary Fund and ANZ. He retires next month.

Borrowers should brace for the risk of a sharp rise in interest rates, with recent sharemarket turmoil a "warning sign" of volatility to come.

While the Reserve Bank has again signalled that it expects the official cash rate (OCR) to stay at the current record low of 1.75 per cent for more than another year as inflation stays low, acting governor Grant Spencer said the financial system was easily spooked by unexpected news.

"The market does appear to be nervous about the inflation outlook and the outlook for interest rates," said Spencer, who has spent most of the past 40 years at the central bank and who retires next month.

STUFF The Reserve Bank in central Wellington.

In recent days sharemarkets across the globe have seen wild movements, as investors fret that the US economy is finally showing signs of inflation, after news of stronger than expected wage growth.

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This could mean the recent boom fuelled by cheap borrowing may come to an end sooner than people believed.

"You have to say, well, it's a bit of a warning sign, because that volatility, it shows how nervous the market is about the prospects for interest rates and normalisation of interest rates and inflation," Spencer said.

"Currently the market's expecting that to be gradual. If it was more sharper then you could have more volatility down the track."

Ultimately interest rates would return to more "normal" levels, and while it was expected to be gradual "what we're more nervous about is that if it happens quickly".

A stronger than expected global recovery and resurgent inflation could mean "the interest rate reaction could be quite sudden". As well as hitting demand for exports, Spencer said heavily indebted home owners could also feel pain.

"Mortgage rates, particularly on fixed [rate] mortgages, even if we kept the short rates constant, the OCR constant, those term rates would increase.

"For new borrowers, or people rolling over mortgages, the cost of servicing the mortgage is going to increase when that happens. This is why borrowers, and banks, have to be careful about making sure that debt service capacity is there, not just at today's rates, but at rates that are a bit higher.

Spencer said borrowers should be preparing, to ensure they could cope with a scenario of sharply higher borrowing costs.

"If you're borrowing you should be thinking about if you could afford that mortgage at 2 per cent interest rate higher than you're paying up front," Spencer said, adding that the suggestion was a "typical buffer" rather than a prediction of where interest rates could end up.

"Let's assume that if rates are higher, the borrower can absorb that".

The Reserve Bank's head of economics Dr John McDermott said later that the bank could react to a sharp upswing in interest rates by slashing the OCR, however there was always the risk that its response was not sufficiently timely.

The OCR typically has a direct impact on short term borrowing and savings rates, such as floating rate mortgages, however as it fell below 2.5 per cent in 2016, banks began passing on only a portion of the lower cash rate to customers.