New Zealand's central bank held its Official Cash Rate (OCR) steady at 2.50 percent, as widely expected, saying it expects stronger domestic demand to eliminate the economy's excess capacity by the end of next year, pushing up the inflation rate towards the bank's target.
The Reserve Bank of New Zealand (RBNZ), which has held its rate steady since March 2011, also said the "global outlook remains soft but appears less threatening than was the case earlier in the year," adding the risk of severe deterioration in the euro area has decreased and Chinese economic indicators are more positive. But uncertainty around the U.S. fiscal position is constraining U.S. growth.
Despite this guarded optimism, the bank's governor, Graeme Wheeler, said he was mindful of recent downside surprises to employment and inflation and was keeping a close eye out for any further signs of moderation.
"With the reconstruction-driven pick-up in investment now clearly underway, the Bank will also continue to watch for a greater degree of inflation pressure than is assumed," Wheeler said.
Although economic growth has slowed in recent months, Wheeler said in a statement that over the next two years economic growth is "expected to accelerate to between 2.5 and 3 percent per annum."
Reconstruction following the Canterbury earthquake is gathering pace and the housing market is strengthening while mortgage rates have declined due to lower funding costs for New Zealand's banks and increased competition.
Dampening factors include the government's fiscal consolidation, continued caution by households and the "high New Zealand dollar continues to be a significant headwind, restricting export earnings and encouraging demand for imports," Wheeler said.
New Zealand's Gross Domestic Product expanded by 0.6 percent in the second quarter from the first for an annual growth rate of 2.6 percent, and the headline inflation rate eased to 0.8 percent in the third quarter, down from 1.0 percent.
The RBNZ targets annual inflation of 1-3 percent.