No password prompt logging into Postgres 8.4

Using th new postgresql 8.4.0 (compiled)
On Ubuntu 8.10

I did an initdb, added a password to the postgres user and then
changed the pg_hba.conf to:

local all all md5
host all all 127.0.0.1/32 md5

Restarted Postgresql.

If I log in normally:

postgres(at)ben-desktop:~$ psql
Password:
psql (8.4.0)
Type "help" for help.

postgres=#

But if i do :

ben(at)ben-desktop:~$ psql -Upostgres
psql (8.4.0)
Type "help" for help.

postgres=#

You can also do :

ben(at)ben-desktop:~$ psql -hlocalhost -Upostgres
psql (8.4.0)
Type "help" for help.

postgres=#

Note no password prompt either time!

Looks like a bug or am I not understanding this properly.

Ben