Reserve Bank holds New Zealand interest rates, but warns rise imminent

The Reserve Bank of New Zealand left its official cash rate (OCR) unchanged at the historic low of 2.5 percent Thursday, but warned a rise would come soon as inflationary pressures are building. Reserve Bank governor Graeme Wheeler said economic expansion had considerable momentum, with prices for export commodities remaining very high, especially for dairy products. Consumer and business confidence were strong and the rapid rise in net inward migration over the past year had added to consumption and housing demand, he said in a statement. Construction activity was being lifted by the rebuild of the earthquake-battered Canterbury region and by work in Auckland, the biggest city, to address the housing shortage. GDP had grown by 3.5 percent in the year to September last year, and growth was expected to continue around this rate over the coming year. The high exchange rate had continued to dampen inflation in the traded goods sector, but the Reserve Bank did not believe the current level of the exchange rate was sustainable in the long run. "While headline inflation has been moderate, inflationary pressures are expected to increase over the next two years. In this environment, there is a need to return interest rates to more- normal levels. The bank expects to start this adjustment soon," said Wheeler. The Reserve Bank remained committed to increasing the OCR as needed to keep future average inflation near the 2 percent mid- point of its 1-percent to 3-percent target range. The OCR has been at 2.5 percent since March 2011, and will next be reviewed in March this year.