Reserve Bank of New Zealand holds interest rate at 3.5 percent

The Reserve Bank of New Zealand on Thursday held the official cash rate (OCR) at 3.5 percent, citing falling commodity prices and the high exchange rate as curbs on economic growth.

New Zealand's economy was expected to grow at an annual pace of 3.7 percent over 2014, Reserve Bank governor Graeme Wheeler said in a statement.

Economic growth continued to be supported by increasing construction activity and strong consumption and business investment, with a high level of net immigration adding to domestic demand as well as productive capacity.

"Economic growth is projected to moderate in response to recent commodity price declines and the impact of policy tightening. The high exchange rate continues to restrain growth in the traded sectors," said Wheeler.

"The exchange rate has yet to adjust materially to the lower commodity prices. Its current level remains unjustified and unsustainable. We expect a further significant depreciation, which should be reinforced as monetary policy in the U.S. begins to normalize."

The economy appeared to be adjusting to policy measures taken by the Reserve Bank over the past year, said Wheeler referring to tightening of mortgage lending requirements and four rises that have lifted the OCR from 2.5 percent since March.

House price inflation continued to ease, despite strong net immigration, while consumer price index inflation remained moderate, reflecting "subdued wage increases, well-anchored inflation expectations, weak global inflation and the high New Zealand dollar."

"However, spare capacity is being absorbed and annual non- tradables inflation is expected to increase. Risks also remain around how strongly net immigration will affect housing demand, and the extent to which pressures in the construction sector will impact broader inflation," said Wheeler.

"In light of these uncertainties, and in order to better assess the moderating effects of the recent policy tightening and export price reductions, it is prudent to undertake a period of monitoring and assessment before considering further policy adjustment," he said.

However, further OCR rises were expected as the Reserve Bank aimed to keep average inflation near the 2-percent mid-point of its 1-percent to 3-percent target range.