31 Oct 2013

Dollar may delay expected interest rate increases

5:41 pm on 31 October 2013

The high New Zealand dollar may delay expected interest rate increases next year.

The Reserve Bank says the economy is growing and inflation is rising, but a stronger currency means there may be less pressure to raise the cost of borrowing.

The central bank kept the official cash rate on hold at 2.5% on Thursday morning.

However, it says rate rises are likely in 2014, with robust consumer spending and an improving housing market prompting a stronger than expected improvement in economic growth.

Activity is picking up, with the bank estimating that the economy grew by more than 3% in the year to September, led by household spending, a rise in house building and stronger global dairy prices.

Inflation is also increasing and is expected to rise to the middle of the Reserve Bank's 1-3% target band.

However, the Reserve Bank says there are forces that could weigh on demand. New rules restricting low deposit loans are expected to slow house price growth. The global economy also remains patchy and the dollar remains high, curbing returns to exporters.

The Reserve Bank says the strength of the housing market will determine the timing and number of rises needed, though its governor, Graeme Wheeler, points out that a higher dollar may delay any increases.

Most economists are picking the central bank will start raising rates from March, while some think that June is more likely.