The Reserve Bank held the official cash rate at its record low of 2.5% yesterday, but stressed there were rising concerns over the effects of strong global dairy prices.
Although analysts expected the OCR to remain unchanged, with most still predicting a hike in March or April, the main concerns surrounding inflation pressures continue to be Canterbury's rebuild, house prices, plus the ongoing strength of the New Zealand dollar - which gained against the US dollar after the bank's announcement yesterday.
Reserve Bank governor Graeme Wheeler said New Zealand's terms of trade were at a 40-year high, household spending was rising and construction activity was being lifted by the Canterbury rebuild and Auckland's housing shortage.
''The high exchange rate is a particular headwind for the tradables sector and the bank does not believe it is sustainable in the long run,'' Mr Wheeler said in a monetary policy statement released yesterday.
While Mr Wheeler said the OCR would be raised ''as needed'', Westpac chief economist Dominick Stephens believed the statement indicated the bank would initially raise the OCR in March, as opposed to April, and would ''substantially lift'' it during 2014 - by 110 basis points during the year.
Mr Stephens said the outlook was similar to previous statements, except for the mention of commodity prices, which have been driven by dairy exports.
''The terms of trade recently hit a 40-year high, and have presumably become a significant factor in the Reserve Bank's monetary policy calculations,'' Mr Stephens said.
ASB senior economist Nick Tuffley said much of the bank's focus was on the strong terms of trade ''which largely reflected the continued strength in dairy prices''.
''Given the terms of trade represents New Zealand's purchasing power, its continued strength bodes well for our national income,'' Mr Tuffley said.
The Reserve Bank assumed the terms of trade would ''ease modestly over the coming years'', but also considered a scenario where it held up around current high levels, he said.
Earlier this week, the Reserve Bank exempted new home lending from its loan-to-value ratio (LVR) ''speed limit'' restriction,
but data on the effects on the housing market is only just becoming meaningful.
Mr Wheeler said the LVR restrictions ''should help slow'' house price inflation, but that data to date on the effects of the restrictions was limited.
''We will continue to monitor outcomes in the housing market closely,'' he said.
Annual consumer price index inflation increased to 1.4% for the quarter to September, and inflation pressures were projected to increase, Mr Wheeler said.
''The extent and timing of such pressures will depend largely on movements in the exchange rate, changes in commodity prices and the degree to which momentum in the housing market and construction activity spills over into broader cost and price pressures,'' Mr Wheeler said.
