The Reserve Bank has sent a stronger warning that interest rate rises are not far off, due to a strengthening economy.
As expected, the Bank on Thursday left the Official Cash Rate at a record low 2.5%. The rate has been at this level since 10 March 2011. Previously it had been 3% since 29 July 2010.
Reserve Bank Governor Graeme Wheeler. Photo: RNZ / Diego Opatowski
The Reserve Bank estimates that the economy grew more than 3% in the year to September.
This expansion in activity has more momentum than previously thought, fed by rising consumer spending and construction activity, and stronger global dairy prices. That is soaking up spare productive capacity - particularly in the housing market.
Governor Graeme Wheeler says interest rate rises will be needed to combat rising inflation pressures.
Mr Wheeler is aiming to keep inflation at 2%, the mid-point of the target band, and forecasts interest rates will need to rise more than 2% over the next couple of years.
Most economists predict that interest rates are likely to start rising in March.
The Reserve Bank also remains uncomfortable about house price inflation, particularly in Auckland. It says new restrictions on low deposit loans should help slow house price growth, though evidence of its effectiveness is limited to date.
More aggressive approach may be needed - BNZ
Bank of New Zealand head of market economics Stephen Toplis says the Reserve Bank has been very consistent in signalling rate rises from March 2014 and an even more aggressive approach may be needed by it to cool inflation.
Mr Toplis says all of the risks to interest rates are upwards and it could be that the economy is stronger than the Reserve Bank is forecasting. He says that would lead to higher inflation, which could ultimately push interest rates even higher than what is anticipated by the central bank.
