New Zealand central bank holds interest rate at 2 percent

New Zealand's central bank on Thursday held its official cash rate (OCR) at 2 percent, but issued a warning on the country's over-valued dollar, which was causing negative inflation.

In its regular OCR review the Reserve Bank of New Zealand (RBNZ) noted a range of pressures slowing global growth, including ongoing "political uncertainty," unprecedented levels of monetary stimulus and significant surplus capacity in many economies.

These were suppressing global inflation and economies with low interest rates relative to New Zealand were pushing up the New Zealand dollar exchange rate, RBNZ governor Graeme Wheeler said in a statement.

"The high exchange rate continues to place pressure on the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector," said Wheeler.

"A decline in the exchange rate is needed."

Domestic growth - with gross domestic product up 0.9 percent in the second quarter - was expected to remain supported by strong net immigration, construction activity, tourism, and accommodative monetary policy.

"High net immigration is supporting strong growth in labour supply and limiting wage pressure," said Wheeler.

"House price inflation remains excessive, posing concerns for financial stability. There are indications that recent macro-prudential measures and tighter credit conditions in recent weeks are having a moderating influence."

Headline inflation at 0.4 percent was being held below the RBNZ's target band of 1 percent to 3 percent by continuing negative tradables inflation.

Annual consumer price index inflation was expected to weaken in the September quarter, reflecting lower fuel prices and other factors, and then rise from the December quarter, reflecting stimulus measures, the strength of the domestic economy, reduced drag from tradables inflation, and rising non-tradables inflation.

"Although long-term inflation expectations are well-anchored at 2 percent, the sustained weakness in headline inflation risks further declines in inflation expectations," said Wheeler.

He left the door open for future imminent cuts in the OCR, saying they might be needed to ensure that inflation settled near the middle of the target range. Endit