Nor would it be the cause of a rise in interest rates which was likely to happen later this year, he said after a post-budget address in Auckland today.
Mr Key told the Trans Tasman Business Circle the GST increase would be ignored by the Reserve Bank in its inflation considerations although forecasts suggested inflation was likely to rise to 5.9 percent in the first quarter after the new GST rate comes into effect on October 1.
"It takes about three quarters after that for that to filter out of the system."
He said having a higher inflation rate was not unusual and in the last quarter before the Labour Government left office, inflation was 5.1 percent.
"And in fact in the years when they were in office where there were no adjustments to tax rates for New Zealanders, inflation rose by 29 percent."
He said once the GST increase went through the system, "inflation starts normalising at around 2.4 percent".
Treasury predictions were that in the next three or four years wages would rise at a faster rate than inflation.
When preparing the budget the Government considered the impact of inflation and "made sure we were comfortable it wouldn't flow into higher interest rates, and we are.
"It doesn't mean that the Reserve Bank might not increase interest rates in the middle of the year. That is ultimately the decision for the Reserve Bank governor to make, but he has been signalling for quite some time that interest rates are likely to rise in New Zealand in the middle of this year.
"Australia has had six interest rate hikes since they have been coming out of the recession so if there are interest rates hikes in the middle of the year it won't be as a result of the budget, it will actually be a sign of economic strength starting to come back into the New Zealand economy."
After his speech Mr Key told reporters it was important people understood the inflationary effect of the GST rise was a "one-off effect".
He said the tax cuts came at the right time to stimulate the economy but when considered over time, the Government was not borrowing to implement the cuts.
"When you take into effect the dynamic effects of tax cuts... over time there is a timing issue but we still believe it to be revenue positive after four years and that is why the net debt track comes down," he said.
Labour is arguing that an increase in inflation as a consequence of the tax cuts will mean most families will be worse off.
