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The Reserve Bank is keeping a watchful eye on the country's property market, which has started heating up as low mortgage rates and easier lending criteria encourage first-home buyers.
RBNZ governor Graeme Wheeler, who held the official cash rate at 2.5% today, says the housing market, particularly Auckland, is starting to strengthen with cheaper bank funding costs leading to increased competition and lower mortgage rates.
The bank sees house prices as still elevated relative to income and rents, with Auckland house prices growing faster than the rest of the country.
That has led to a pick-up in household credit growth, housing market turnover and house price inflation in recent months and the central bank is keeping close tabs on the sector to ensure real estate values don't get away on it as they did during the boom of the mid-2000s.
"Higher house price inflation and increased household expenditure would likely lead to higher inflationary pressures than is currently projected," the bank says in special commentary for the December monetary policy statement.
"All else equal, such a development could necessitate a higher OCR."
In the October review, Mr Wheeler zeroed in on the country's tepid pace of inflation, which fell below the central bank's 1% to 3% target band in the September quarter, when the annual pace slowed to just 0.8%.
The bank is forecasting annual inflation to stay near the bottom of the band in the next year, rising to 2% in the March 2015 quarter as building activity ramps up and the persistently strong currency starts to weaken.
New Zealand's property market has been slowly gathering pace this year after a muted period when credit lines dried up in the wake of New Zealand's finance sector collapses and the global financial crisis.
The bank said any credit-fuelled expansion in house prices would also undermine the country's financial stability and could expose households and banks to sharp falls in house prices.