Interest rate held at 2.5pc

20:57, Jan 30 2013

The Reserve Bank is holding official interest rates at 2.5 per cent, but is firing a warning shot at the heating housing market and says the currency was "over-valued".

Bank governor Graeme Wheeler said this morning he did not want to see financial stability or inflation hit by housing demand getting too far ahead of supply

The central bank was widely expected to keep rates at low levels, with inflation running below the Reserve Bank's target band and unemployment levels high.

The New Zealand dollar also remains higher than the Reserve Bank assumed late last year, trading at US83c just before this morning's announcement, down almost US1c in the past day.

The currency rose to US83.4c just after the announcement, even though the central bank said the currency was "over-valued", which was holding inflation down and undermining profits in the export sector.

The RBNZ said economic growth would strengthen over the coming year, reducing spare capacity and bringing inflation slowly back towards the 2 per cent target mid-point.

"On balance, it remains appropriate for the OCR to be held at 2.5 per cent," Wheeler said.

But he pointed out that house-price inflation had increased, and said the central bank was keeping a close eye on that, as well as household credit growth.

"The Bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply," Wheeler said.

Meanwhile he said global growth was set to recover in 2013 with economic indicators improving in many of our trading partners.

"Consistent with this, global financial market sentiment is positive, contributing to lower bank funding costs and some reduction in interest rates faced by households and firms in New Zealand," he said.

"Domestically, recent data on business confidence and construction activity suggest GDP growth is recovering from the softness seen through the middle of last year.

"The Canterbury rebuild is gathering momentum and its impact will be felt more broadly in incomes and domestic demand.

"Inflation remains subdued and is currently just below the bottom of the Reserve Bank's inflation target range. This mainly reflects the impact of the overvalued New Zealand dollar.

"The high currency is directly suppressing inflation on traded goods, and is undermining profitability in export and import-competing industries. At the same time, the labour market remains weak and fiscal consolidation is dampening growth."

Economic growth has been sluggish, with expansion of just 0.2 per cent in the September quarter. The Australian economy is also cooling.

Figures out yesterday showed the seasonally adjusted number of consents for new houses in New Zealand rose 9.4 per cent in December 2012, in another sign of the construction rebound from extremely low levels in 2011. Most of the rebound in recent months has been centred on the Christchurch rebuild.

The Reserve Bank has held the cash rate at 2.5 per cent since March 2011

Contact James Weir
Business editor