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Reserve Bank governor Alan Bollard has delivered a stern Christmas warning: mortgage interest rates may have to rise next year to dampen inflation.
Much as expected, he has kept the official cash rate on hold at 7.25 per cent but he said firmly that he is concerned about the rate of inflation in the future and something will have to be done.
He expressed renewed concern about the housing market which appeared to have developed new momentum. He also fired a shot at politicians warning that tax cuts or new spending would have to be met by interest rates rising to keep inflation in check.
Some economists had expected him to raise the rate, which has been unchanged all year, to try and squeeze New Zealand's 4 per cent annual inflation rate lower.
The rapid fall in world oil prices and the rise of the New Zealand dollar - to a 10-month high of US69 cents this week - has meant Dr Bollard has not had to apply the monetary brake harder.
Dr Bollard said in his quarterly Monetary Policy Statement medium-term pressures remained persistent.
"We are less optimistic about medium-term prospects," he said.
He left the door well ajar for further rate risks, saying "a firmer monetary policy stance could still be required to maintain downward pressure on inflation in the medium-term".
"Further tightening cannot therefore be ruled out," he said, adding that any easing of policy must remain some considerable way off.
He is especially worried about the housing market which is showing no signs of slackening - in fact, appears to be regaining momentum.
High house prices give consumers the confidence to spend and borrow more exacerbating inflation pressures and national debt problems.
He noted houses were now selling as fast as any time this year and the average number of days it takes for a house to sell is a reliable indicator that house prices will rise.
Dr Bollard acknowledged the damage the high currency was doing to exporters.
"If sustained (it) could threaten the ongoing rebalancing of the economy," he said.
However, he said primary producers were getting relief from favourable commodity prices, which the bank now expects to continue for longer as a result of global supply shortages.
The bank has raised its forecasts for economic growth for the year to March 2007 and for 2008 but lowered it for 2009. It now expects GDP to grow by 2.1 per cent in 2007, 2.7 per cent in 2008 and 2.5 per cent in 2009.
Dr Bollard issued a thinly veiled warning to the Government about tax cuts or new spending, indicating either would be met by interest rates rising.
He noted the Government's budget position had strengthened as a result of the stronger-than-expected economy and this created a risk of "new initiatives" at a time when there was less headroom to accommodate additional fiscal expansion.
The bank had not factored in policy changes to its projections but Dr Bollard noted "fiscal policy poses a particular rise for the medium-term outlook".
If the Government stimulated the economy further with new spending or tax cuts, "any initiatives would need to be factored into the outlook and could imply additional monetary policy response".
Dr Bollard said that in view of New Zealand's hefty current account deficit -- running at nearly 10 per cent of GDP -- the exchange rate appeared "unjustified".
A slight easing in the current account account deficit is forecast, although even in 2009 it is projected to remain at 7.5 per cent of GDP.
The announcement gave the New Zealand dollar a lift, with the currency moving from around US68.25c just before the decision to around US68.45c soon after.
BNZ senior economist Craig Ebert said today's statement from the Reserve Bank was justifiably more hawkish than previous statements.
"By the look of it the RBNZ is setting the scene for a rate hike early in the next year, but they still need to see the evidence to tip them into doing so," he said.
Citigroup market economics co-head Stephen Halmarick said the Reserve Bank was probably close to tightening this time and it sounded like it would not take much to push it into hiking in January.
JPMorgan economist Jarrod Kerr said the Reserve Bank had implicitly forecast another tightening by March, but that was still data dependant.
Household demand was surprising on the upside and fiscal stimulus was a concern, he said.
"So, the RBNZ is on hold until at least March and a move then will be a close call, but JPMorgan maintains its view of unchanged policy."
- NZPA/REUTERS
