The Reserve Bank of New Zealand (RBNZ) on Friday signaled the possibility of further interest rate rises in coming years as it struggles to contain inflation and maintain sustainable economic growth.
In a foreword to the RBNZ's Statement of Intent for 2014 to 2017, governor Graeme Wheeler said GDP is expected to grow by about 3.5 percent this year, with output, employment and investment growing strongly.
"The Bank has played a major role in catalyzing the current economic expansion. Six years of stimulatory monetary policy that led to the lowest interest rates in 50 years, moderated New Zealand's recession in 2008 and 2009 and provided a platform for the current economic recovery," said Wheeler.
"But with strong impetus also from commodity export prices, residential and commercial construction and net immigration, the economy is now growing significantly faster than the growth rate of potential output, and inflationary pressures in the non- tradables sector are increasing," he said.
"Withdrawing some of the monetary stimulus by raising interest rates closer to more normal levels will start to moderate growth of overall demand and avoid the damaging impact of high inflation on competitiveness, real incomes and output growth."
However, the factors driving strong economic performance also attracted large inward cash flows and the resulting upward pressure on the New Zealand dollar diminished the competitiveness of exporters.
House prices were overvalued on several measures and household debt levels were high, while inflation in the non-tradable sector was running at 3 percent and pricing pressures in the construction sector and some service industries continued to rise, he said.
The RBNZ's strategic priorities had three themes: continuing to strengthen its performance, developing a more integrated approach to policy, and improving infrastructure and reducing enterprise risk.
"Having credible monetary policy and well-anchored inflation expectations mean that the Bank is able to respond to economic shocks by adjusting interest rates less than otherwise would be the case. Continuing to build our understanding of the monetary policy/macro-prudential interface is an important part of our objectives. It will also be important to maintain close links with fiscal policy settings," said Wheeler.
The RBNZ has raised the Official Cash Rate by 25 basis points three times since March, after holding it at a record low of 2.5 percent since March 2011./.