Reserve Bank governor Graeme Wheeler warns he's likely to resume raising interest rates in the future despite a softer immediate economic outlook, surprising economists and driving up the kiwi dollar.
"Modest inflation pressures suggest the (economic) expansion can be sustained for longer than previously expected with a more gradual increase in interest rates," Mr Wheeler said in Thursday's monetary policy statement, where he held the official cash rate unchanged at 3.5 per cent as expected.
"Some further increase in the OCR (official cash rate) is expected to be required at a later stage."
The New Zealand dollar jumped as high as 78.25 US cents, from 76.85 cents immediately before the 9am statement.
The central bank "reinforced its explicit tightening bias - a hawkish surprise to the markets," said Westpac strategist Imre Speizer.
The central bank trimmed its forecast for gross domestic product in the year ending March 31, 2015, to 3.5 per cent from the 3.6 per cent rate seen three months ago.
But it raised its expectations for GDP expansion in 2016 and 2017 to 3.1 per cent in both years, having previously projected annual growth of 2.7 per cent and 2.3 per cent.
The pace and timing of future hikes will depend on how the economy has responded to the 100 basis points of increases earlier this year, particularly how pricing decisions interact with capacity pressures and inflation, how house price inflation develops and how lower dairy incomes affect spending, the bank said.
It has been surprised by the country's tepid pace of inflation, which slowed to an annual one per cent rate in the September quarter as a resilient kiwi dollar continues to keep imports cheap.
Mr Wheeler said the strong exchange rate, falling oil prices and more subdued non-tradable inflation was the cause of soft inflation, and the bank expects that slow pace to persist through the first half of 2015 before creeping higher.
He said the currency remained "unjustifiably and unsustainably high" and that the bank expects "a further significant depreciation," even after its recent weakness as global investors flock to the greenback in anticipation of the Federal Reserve moving away from its zero interest rate policy next year.
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