Meanwhile, an appreciating exchange rate was easing pressure on monetary policymakers, giving "room to move if they want to", he said.
Key's remarks reflect the balancing act of a Government that is trying to avert deeper cuts in the sovereign-credit rating and to oversee a revival of Christchurch. The planned fiscal tightening coincides with threats posed by the European debt crisis, which has damped demand growth in New Zealand's trading partners.
"The New Zealand Government, from a fiscal policy point of view, is quite limited in terms of what they can do [to aid the expansion]," said Khoon Goh, a senior foreign-exchange strategist in Singapore at ANZ.
"The Government has made it a clear goal to return to surplus as soon as possible. They are also very careful to ensure they can retain their current credit-rating status."
Standard & Poor's and Fitch Ratings cut New Zealand's AAA grade on local currency debt one step in September, to AA+. It is still Aaa at Moody's Investors Service. On August 3, S&P affirmed its ratings and called the outlook stable.
At some point, currency appreciation would make the economy "splutter and stutter and probably stop", Key said. At the same time, "a rising exchange rate takes pressure off the Reserve Bank. Base rates are still much higher than they are generally around the world - 2.5 per cent. There are options, so let's see."
Key also warned against making one-way bets on gains in the kiwi, the best-performing Group of 10 currency this year. The currency's appreciation has been a concern at the Reserve Bank of New Zealand, which is on the verge of a leadership change. RBNZ Governor Alan Bollard, who has held the benchmark interest rate at a record-low 2.5 per cent since March 2011, ends his decade-long tenure next month, and former World Bank official Graeme Wheeler replaces him.
"The very fragile global outlook, the tightening up in monetary conditions partly because of the high Kiwi dollar argues against the need to lift rates any time soon," said Su- Lin Ong, head of Australian economic and fixed-income strategy at RBC Capital Markets in Sydney.
Key last week released plans for a new urban centre in Christchurch, saying as much as $30 billion could be spent on the overhaul. The Government's direct cost from the quakes is about $13 billion. Officials last week formed an organisation, Invest Christchurch, to attract capital from global and domestic investors into the region.
"Christchurch is definitely going to cost more money," Key said. "The issue here is that things have taken longer and cost more."
That may strain the budget Key is trying to balance. Finance Minister Bill English anticipates the Government returning to a surplus in the 2014-15 fiscal year of $197 million. The 2011-12 deficit was estimated in the May Budget at $8.44 billion.
"We're on track to get there," Key said yesterday of the surplus target. "We think it's important that we get there. It's part of the confidence that we give the rating agencies and others, that we're taking our responsibilities seriously."
To help reduce debt, the Government is seeking to raise $5 billion to $7 billion by offering stakes of as much as 49 per cent in four energy companies, and by lowering its share of Air New Zealand.
- Bloomberg
