KEY POINTS:
New Zealand's official interest rate remains unchanged at 7.25 per cent, but Reserve Bank Governor Alan Bollard has again warned that higher rates could be on the way.
He also raised concerns that rising government spending was adding to inflationary pressures.
The country's Official Cash Rate has been stable since December 2005, through nine reviews by the Reserve Bank.
Releasing his latest decision today, Dr Bollard said the near term inflation outlook was relatively benign, but the Reserve Bank remained concerned about the risk of higher inflation in the medium term.
"In the absence of clear indications of a moderation in housing and domestic demand, it is likely that further policy tightening will be required," he said.
The position would be reassessed in the light of a full review of economic forecasts in the Reserve Bank's next Monetary Policy Statement in March.
"A return to a moderating trend in housing and domestic demand will be essential if we are to see a reduction in medium term inflation pressures," Dr Bollard said.
While indicators showed that economic growth had continued to moderate in the third quarter of 2006, it was increasingly apparent that domestic demand had rebounded since then.
Retail trade had picked up, there was a resurgent housing market, and consumer and business confidence had recovered strongly.
The main drivers appeared to be a decline in petrol prices since October, an increase in net immigration and an expansionary fiscal policy, he said.
Dr Bollard noted that headline inflation had fallen, with annual Consumers Price Index (CPI) inflation dropping to 2.6 per cent in December as a result of lower oil prices and a strengthening exchange rate in the fourth quarter.
The CPI was projected to decrease considerably further through 2007, helping to lower inflation expectations.
But the medium term outlook was less rosy, with annual rates of inflation projected to return to the upper part of the Reserve Bank's 1-3 per cent target range through 2008 and into 2009, Dr Bollard said.
The Reserve Bank was particularly concerned that its assumptions about the housing market and consumer demand - that they would resume a slowing trend during 2007 and 2008 - were looking more uncertain.
That was particularly the case if further fiscal expansion happened, he said.
Dr Bollard's comments today were not the first time he has warned about the possible need for future interest rate rises.
He gave a similar warning at the most recent previous review of the OCR in December, and has caused concern among some economists that he threatens too much and does not act enough.
Among those who will be disappointed Dr Bollard did not raise the rate today will be BNZ head of research Stephen Toplis who is worried about the risk of the economy "seriously overheating".
Mr Toplis said recently that Dr Bollard had consistently defied the need to raise the OCR despite strong supporting evidence to do so.
The New Zealand dollar, which had eased overnight against the US dollar, initially slipped further after the Reserve Bank announcement, before regaining some of its lost ground.
The kiwi, which was trading at US69.59c at 7.30am compared with a US70.30c peak yesterday, was at US69.80c at 9.20am.
- NZPA
