The Reserve Bank has left its official cash rate unchanged at 2.5 per cent, which was in line with market expectations, but said it was watching house price inflation closely.
Reserve Bank Governor Graeme Wheeler said global growth is set to recover this year with economic indicators improving for many of New Zealand's trading partners.
He said in a statement global financial market sentiment was positive, contributing to lower bank funding costs and to some reduction in the interest rates faced by households and firms.
Domestically, recent data on business confidence and construction activity suggested economic growth was recovering from the softness seen through the middle of last year, he said.
"The Canterbury rebuild is gathering momentum and its impact will be felt more broadly in incomes and domestic demand," he said.
House price inflation had increased "and we are watching this and household credit growth closely".
He said the bank did not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply.
Inflation remains subdued and is currently just below the bottom of the Reserve Bank's inflation target range, mainly reflecting the impact of the strong New Zealand dollar.
"The high currency is directly suppressing inflation on traded goods, and is undermining profitability in export and import competing industries," Wheeler said. "At the same time, the labour market remains weak and fiscal consolidation is dampening growth."
Overall, the bank expected economic growth to strengthen over the coming year, reducing spare capacity and bringing inflation slowly back towards the two per cent target midpoint.
Annual inflation was just 0.9 per cent the December 2012 year, according to Statistics NZ.
