The Reserve Bank is comfortable with interest rates at the current level and signalled no rate cuts on the horizon, as domestic inflation pressures outweigh risks from international market turmoil.
Reserve Bank Governor Alan Bollard told a group of Sydney business leaders there remained supportive factors for theNew Zealand economy, including tax cuts and strong terms of trade.
However, there was a risk that a slowing US economy and credit market problems may turn the forecast moderate slowdown over the next few years into a sharp downturn.
"Monetary policy in New Zealand has been relatively tight for some time, and we think the current setting of 8.25 per cent with a flat outlook remains appropriate," Bollard said.
"However, we will need to keep a close eye on global economic and financial developments for any indications that global activity is slowing by more than most forecasters are currently projecting."
New Zealand banks - the largest ones Australian-owned - had virtually no direct exposure to the US sub-prime market, he said, although households and businesses were feeling the pinch from higher interest rates as a result of tightening credit conditions offshore.
However, monetary policy also had to focus on the inflation outlook.
"Inflation pressures in New Zealand remain relatively strong. Higher food and commodity prices are adding to inflation in New Zealand as they have in other countries, including Australian and China, which have continued tightening monetary policy in recent months," Bollard said.
The Reserve Bank would focus on northern hemisphere financial market turbulence, conditions in the Australasian sector, to what extent US and European growth dictates East Asian growth, and commodity price developments, as well as the domestic housing market and spending growth.
"Much rests on the extent to which the economies of the Asia-Pacific countries, which are important trading partners for New Zealand, can remain largely de-coupled from these developments," Bollard said in speech notes.
Government spending and proposed personal tax cuts, as well as strong export revenues, were expected to balance weaker household spending, dry weather conditions and the impact of the exchange rate on exporters in coming years.
