Reserve Bank governor Graeme Wheeler is sharpening his focus on New Zealand's bubbling housing and construction sectors and the threat they pose to inflation.
The central bank kept the official cash rate on hold at 2.5 percent today, while saying the "removal of monetary stimulus will likely be needed in the future and linking any hike to how much the growing momentum in the housing market and construction sector spills over into inflation pressures", Mr Wheeler says in a statement.
He kept the expectation the OCR will not move this year.
"It's a little bit firmer in the language than the June policy assessment," ASB Bank chief economist Nick Tuffley says. "The key thing between now and then is the wording tying in when rates go up to the timing of when we start to see housing related pressures flowing through."
Mr Wheeler has had to balance the competing pressures on monetary policy of a strong currency keeping imported prices down, against pressures in the Auckland housing market and a massive reconstruction effort in Canterbury, while inflation has been below the bank's target band of between 1 percent and 3 percent.
Government figures earlier this month showed the consumer price index rose at an annual pace of 0.7 percent in the second quarter, its slowest in 14 years, with building price pressures in housing and construction remaining relatively contained.
In its June monetary policy statement, the central bank forecast the annual CPI to return to the band in September of this year, rising above 2 percent in June 2015.
Mr Tuffley says the weaker currency means there will not be the same shield against imported prices and that inflation will "rebound quite quickly".
The kiwi dollar climbed to 79.70 US cents after Mr Wheeler's statement, from 79.30 cents immediately before. The trade-weighted index rose to 75.53 from 75.17. The kiwi averaged 76.55 in the second quarter on a trade-weighted basis, below the Reserve Bank's projected 77.50.
Mr Wheeler today said the New Zealand dollar is still high and is dragging on exporters by restricting their earning power and encouraging demand for imported substitutes. That is a softer view than last month, when he explicitly said the kiwi was over-valued.
Westpac Banking Corp chief economist Dominick Stephens says in a note that the link between higher interest rates and accelerating growth was "very significant".
"For a long while the RBNZ had maintained the assumption that rising house prices and the construction boom would not prove inflationary. It seems the RBNZ is beginning to abandon that view and is taking more seriously the potential inflationary consequences of the buoyant economy."
ASB and Westpac are sticking to their expectation of a rate hike in March next year, and traders are pricing in 54 basis points of increases to the key rate over the coming 12 months, according to the Overnight Index Swap curve.
Mr Wheeler says the domestic economy's recovery is improving across more sectors, albeit in an uneven way.
"Consumption is increasing and reconstruction in Canterbury will be reinforced by broader national recovery in construction activity, particularly in Auckland," he says. "This will support aggregate activity and eventually help to ease the housing shortage."
New Zealand's construction industry will get another boost from the recent swarm off earthquakes in the central North Island, where a 6.5-magnitude quake in the Cook Strait damaged 35 buildings in Wellington. The damage has been relatively limited and Credit Suisse has estimated insured losses will be "well below" $US1 billion.
Mr Tuffley does not think the Wellington quake will put much stress on capacity within the construction sector, but rather it will likely bring forward any planned earthquake strengthening.
"Residential construction is picking up a lot quicker (than commercial)" and is a greater threat to inflation, he says.
Mr Wheeler took another dig at the Auckland and Canterbury housing markets, which have been outpacing the rest of the nation amid a shortage of supply, reiterating the bank "does not want to see financial or price stability compromised by housing demand getting too far ahead of the supply response".
The bank is considering the introduction of macro-prudential tools to limit the level of high loan-to-value ratio home lending as a means to counter the threat of low-equity home lending the stability of the banking sector.