Speaking to the Development West Coast Conference in Christchurch, he said the economy was performing well in many respects.
The greatest threat to the expansion of the economy lay in possible international and economic developments and their implications for the global trading environment.
The main domestic risk — and one that could be triggered by developments offshore — was a significant correction in the housing market, he said.
"Numerous measures indicate New Zealand house prices are significantly inflated relative to usual valuation indicators."
As had been the case in several other countries, monetary policy had been made more challenging in New Zealand by low global inflation and zero or negative policy rates in several major economies, Mr Wheeler said.
Downward pressure had been put on New Zealand’s interest rate structure and contributed to asset price inflation and upward pressure on the New Zealand dollar. The trend might finally be turning.
"At this stage, global and domestic developments do not cause us to change our view on the direction of monetary policy as outlined in the November monetary policy statement.
"We expect monetary policy to continue to be accommodative and the projected policy settings will help generate sufficient growth to have inflation settle near the middle of the target range," Mr Wheeler said.
Earlier in his speech, he said relative to trends over the past two decades, New Zealand was experiencing stronger economic growth, lower inflation and a lower unemployment rate — even with record levels of labour force participation.
The Achilles heel of many New Zealand expansions, a large current account deficit, had not eventuated.
However, not everything was positive, he said. The overall expansion, now entering its eighth year, was weaker than other post-World War 2 ex-pansions. GDP growth on a per capital basis had been slow and labour productivity growth had been disappointing.
House price inflation was much higher than desirable and posed concerns for financial stability and the exchange rate was higher than the economic fundamentals would suggest was appropriate.
In the absence of major unanticipated shocks, prospects looked good for continued strong growth over the next 18 months, driven by construction spending, migration, tourist flows and accommodative monetary supply.
Supply disruptions associated with the Kaikoura earthquake were unlikely to have a major impact on the overall economic growth, although some increase in freight costs and construction cost inflation was likely.
At a glance
• Economic growth of 3.5% expected for next 18 months
• Overall expansion is now weaker than any other post-WW2 expansions
• Considerable political and economic uncertainties next year
• Interest rates likely to remain low
