New Zealand’s official cash rate (OCR) remains at a record-low 2.5 per cent, but Reserve Bank governor Graeme Wheeler says rates are set to rise next year.
However, he says the strong New Zealand dollar will give him room to move as to the timing and size of any hikes.
“Sustained strength in the exchange rate that leads to lower inflationary pressure would provide the bank with greater flexibility as to the timing and magnitude of future increases in the OCR,” Mr Wheeler said in a statement on Thursday.
He has to juggle the competing tensions between a strong currency holding down imported inflation and a resurgent property market and increasing construction activity threatening to fuel consumer spending.
The strength in the kiwi has undermined the export sector and held back parts of the economic recovery, and delays to the US Federal Reserve’s planned tapering of its stimulus program have kept the local currency high relative to the US dollar.
The kiwi’s persistent strength prompted New Zealand’s Reserve Bank to intervene in currency markets earlier this year in a bid to shear the top off a peak.
Mr Wheeler on Wednesday reiterated his expectation that the key rate will stay unchanged this year and rise in 2014, saying “the extent and timing of the rise in the policy will depend largely on the degree to which the momentum in the housing market and construction sector spills over into broader demand and inflation pressures”.
The central bank this month imposed restrictions on the level of residential property lending banks can write with small deposits as a means to stifle a bubbling housing market in Auckland and Christchurch.
“Recently introduced restrictions on high loan-to-value mortgage lending are expected to help slow house price inflation and the bank will continue to monitor the situation closely,” Mr Wheeler said.
The bank estimates the restrictions will lower annual house price inflation by between one and four percentage points, and trim household credit growth by between one and three percentage points.
It predicts inflation will rise to its two per cent and says it will aim to keep it at its target midpoint over the medium term.
