The Official Cash Rate is held at 0.25 percent, the Reserve Bank confirms.
But inflation pressures remain, and economists are forecasting a cash rate rise later next year.
Delivering its May Monetary Policy Statement on Wednesday, the second for the year, the Reserve Bank said while economic growth slowed over summer, New Zealand's economy continues to recover following COVID-19.
"The global economic outlook has continued to improve, with ongoing fiscal and monetary stimulus underpinning the recovery. New Zealand’s commodity export prices have benefited from this rise in global demand," Reserve Bank Governor Adrian Orr said in the statement.
Disruptions to global raw material supplies, higher oil prices and pressure on shipping arrangements are increasing costs.
"These price pressures are likely to be temporary and are expected to abate over the course of the year," the statement said.
Under its monetary policy, the Reserve Bank aims to keep prices stable over the medium term and support maximum stable employment. It's forecasting inflation to peak around 2.6 percent in the near term, dropping back below 2 percent in 2022
With inflation pressures expected to be short-lived rather than long-term, the Reserve Bank sees a need to continue to provide stimulatory support to the economy. It noted uneven economic recovery across sectors, weak business investment and uncertainty around effectiveness of COVID-19 vaccines.
"While New Zealand’s economic recovery has been stronger than many of our trading partners’ recoveries it has been uneven across sectors. Housing-related sectors, such as construction and durable goods (e.g. appliances) retail, have fared better than those most exposed to international tourism," the report said.
The opening of the trans-Tasman bubble is expected to only partially offset tourism losses.
"The economy is assumed to have contracted further over the first three months of 2021 as the loss of international visitors continued to be felt by the tourism sector."
In a Monetary Policy Statement preview released on May 17, ANZ economists expected the Reserve Bank to keep its settings unchanged.
Noting inflation pressures, the bank said reported costs "are through the roof" and pricing intentions are "unchartered territory", with a net 58 percent of companies (67 percent of retailers) intending to raise prices.
ASB senior economist Mark Smith said many of the current price pressures - such as freight disruptions - are temporary, but other pressures are expected to last longer.
Heading into 2021, ASB expects a tighter labour market and wage inflation to pick up. Pricing pressure from the housing market is still flowing through. The bank expects inflation to hold up higher for longer than the Reserve Bank's current forecasts.
"There's a whole front of where prices are going up this year…a large part of it is cost-related but there's also rents, construction costs [and] capacity pressures throughout the economy," Smith said.
So how long can borrowers enjoy record low-interest rates? The current answer is, for at least another year.
ANZ and ASB economists currently expect the Reserve Bank to start hiking the Official Cash Rate in August 2022, with ANZ forecasting a 1.25 percent cash rate by the end of 2023.
ASB expects the cash rate to rise gradually, starting with a 25 basis point rise to 0.50 percent.
"We think the cash rate will top [out] at 1.25 percent which is still very low...an extra percentage point on floating rates and fixed rates will be up but not by nearly as much," ASB senior economist Mark Smith said.
Kiwibank has pencilled in a cash rate rise in November 2022, but says it could be earlier - or later if there's more set-backs.
"Our main message is, interest rates should remain low well into next year," Kiwibank chief economist Jarrod Kerr said.
Referring to the "rapid increase in inflation expectations", senior economist Brad Olsen said the Reserve Bank had to balance the need to provide sustained monetary stimulus to the economy, while recognising heighted global inflation conditions - particularly in the US.
With capacity constraints and supply chain disruption boosting domestic inflation, combined with high housing costs and rents, there's a rising question of whether prices will be higher for longer.
"There was less of a feeling that global inflation would be imported into NZ but with the marked improvement in global economic outcomes and fortunes, there's a feeling there's much broader inflationary pressures building," Olsen said.
Infometrics is forecasting a cash rate rise in 2023. But depending on the Reserve Bank's response to inflationary pressures and how it's tracking, it could be earlier.
"They've got their Large-Scale Asset Purchase (LSAP) programme [capped at $100b) and their Funding for Lending (FLP) programme which will both need, in our minds, to be severely limited before we look at an Official Cash Rate change," Olsen said.
The Official Cash Rate, or wholesale borrowing rate, is the main tool used by the Reserve Bank to control price inflation. Generally, when the economy expands at a faster rate, inflation starts to increase. Raising the cash rate limits the pace of economic growth and therefore, inflation. A low cash rate stimulates the economy by encouraging borrowing, investment and spending.
