Inflation risk to New Zealand economy

Unchecked inflation could threaten to derail New Zealand's economic recovery, Reserve Bank of New Zealand (RBNZ) governor Graeme Wheeler warned Friday in a speech laying the ground for an imminent rise in interest rates. New Zealand's economy had grown faster than comparable economies overseas over the last two years, and achieving price stability would help ensure that the expansion was sustainable, Wheeler said in a published speech to the Canterbury Employers' Chamber of Commerce in Christchurch. "Most of our economic indicators are positive; with the terms of trade at a 40-year high, business confidence is the strongest since 1993, and consumer confidence is at a seven-year peak," Wheeler said. The RBNZ perceived inflation as an important risk to economic expansion and inflationary pressures were building, particularly in the construction sector, and spare capacity was being absorbed rapidly. "Stronger inflation pressures and the increase in interest rates that would accompany them could put pressure on New Zealand' s real effective exchange rate and reduce the competitiveness of our export and import substitution industries," Wheeler said. The RBNZ goal was to keep future average inflation near the 2 percent midpoint of its 1-percent to 3-percent target range, in order to ensure economic activity remained in line with the potential growth of the economy. A further risk to economic expansion was high house prices, which were a major reason for restricting high loan-to-value ratios for home mortgages last year. "Although headline inflation has been moderate, inflationary pressures are building and are expected to increase over the next two years. In such an environment, there is a need to return interest rates to more normal levels, and the bank expects to begin this adjustment soon," he said. The RBNZ has held the official cash rate at a historic low of 2. 5 percent since March 2011, and the next review is in March this year.