New Zealand's central bank held its Official Cash Rate (OCT) steady at 2.5 percent, as expected, saying inflation remains subdued but it expects economic growth to strengthen during the year and it was keeping an eye on house price inflation and household credit for signs of inflation risks.
The Reserve Bank of New Zealand (RBNZ), which has held its rate steady since March 2011, said global growth was set to recover this year and financial markets were accordingly positive, which was helping the lower bank funding costs and interest rates for households and firms.
"Domestically, recent data on business confidence and construction activity suggests GDP growth is recovering from the softness seen through the middle of last year," the bank said in a statement, quoting its governor, Graeme Wheeler.
"Overall, we expect economic growth to strengthen over the coming year, reducing spare capacity and bringing inflation slowly back towards the 2 percent target midpoint," Wheeler said.
New Zealand's Gross Domestic Product expanded by 0.2 percent in the third quarter from the second for annual growth of 2.0 percent, down from 2.6 percent in the second quarter.
"House price inflation has increased and we are watching this and household credit growth closely. The Bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply," he added.
New Zealand's headline inflation rate was largely steady at 0.9 percent in the fourth quarter of 2012 from third quarter's 0.8 percent. The RBNZ targets inflation of 1-3 percent.
Wheeler said the subdued inflation reflected the impact of "the overvalued New Zealand dollar."
The strong dollar is not only supressing inflation traded goods, but also undermining profitability in export and import competing industries, he said, adding that the labour market remains weak and fiscal consolidation is dampening growth.
The New Zealand dollar has been rising since early 2009 against the U.S. dollar and was quoted at around 83 U.S. cents following the central bank's statement, up from around 50 U.S. cents in early 2009.