Reserve Bank of New Zealand holds interest rate at 3.5 pct

Analysts have lowered forecast of further interest rate rises after the Reserve Bank of New Zealand (RBNZ) held its official cash rate at 3.5 percent Thursday, saying a significant depreciation in the country's overvalued dollar was expected.

RBNZ governor Graeme Wheeler said New Zealand's economic growth had been faster than trend over this year, reducing unemployment and raising demands on productive capacity.

Strong construction sector activity, high net immigration, and interest rates, which remained low by historic standards, continued to support expansion, Wheeler said in a statement.

However, output growth was expected to moderate over coming years, towards a more sustainable rate.

"Lower commodity prices and increased global financial market volatility have taken some pressure off the New Zealand dollar. However, its current level remains unjustified and unsustainable and continues to constrain growth in the tradables sector. We expect a further significant depreciation," said Wheeler.

Consumer price index (CPI) inflation was a modest 1 percent in the year to September, kept in check by subdued wage inflation, well-anchored inflation expectations, weak global inflation, falls in oil prices and the high New Zealand dollar.

House price inflation had fallen significantly since late 2013, in part due to interest rate increases and tighter loan-to-value mortgage lending restrictions.

"CPI inflation is currently at a low level despite above-trend growth. However, inflation is expected to increase as the expansion continues. A period of assessment remains appropriate before considering further policy adjustment," he said.

The RBNZ's official cash rate started this year at the historic low of 2.5 percent, where it had sat since March 2011, but rose with four 25-basis-point hikes since March.

An Economic Note from the ASB Bank said the RBNZ had adopted a "dovish tone" on further rate hikes, indicating it could be watering down plans for further fiscal tightening amid concerns over persistently low inflation.

ASB Bank forecast a 25-basis-point hike in September next year and "a further final hike" in March 2016 given the low inflation, although it did expect inflation to start heading up markedly in the second half of next year as the New Zealand dollar fell.

The opposition Green Party said the RBNZ's previous inflation projections were wrong and New Zealanders had suffered unnecessary job losses and higher interest rates as a result.

"Mr. Wheeler reiterated that the level of New Zealand dollar is too high and unjustified, but primarily that is because he kept hiking interest rates when he didn't need to," Green Party co- leader Dr Russel Norman said in a statement.

Inflation in the New Zealand economy was rooted in house and electricity prices and that pressure remained because the government had "pursued its failed policy to leave it to failing markets to sort these things out," said Norman.