The International Monetary Fund on Tuesday said that New Zealand may need to tighten monetary policy if strong house price inflation and credit growth adds to inflationary pressures.
"The current accommodative monetary policy stance is appropriate, although a tightening may be warranted if house-price and credit expansion begin to fuel inflationary pressures," the Fund said in a regular review report on the economy.
"Rising house prices, which are already elevated by standard metrics, are a growing concern, as they could lead to an increase in debt-financed household spending which would put pressure on aggregated demand, and increase the risk of an abrupt price correction," the report noted.
The IMF warning adds to worries over the country's overheating property market. The Reserve Bank of New Zealand has already stepped up its vigil against surging housing prices and credit and recently asked banks to hold more capital against risky home loans.
The central bank had also urged banks to slowdown lending saying that easier credit terms are stoking demand.
A few Directors of the IMF review mission pointed out that higher interest rates could lead to further exchange rate appreciation. The central bank recently intervened in the forex market to weaken the currency, which the bank said was "overvalued."
According to IMF, the main risks to New Zealand's economic recovery were persistent low national savings and large external liabilities, and high and rising house prices.
"While a recovery is underway, growth this year is likely to remain modest, with an increase in construction activity offset by headwinds from budget deficit reduction, the strong dollar, and the recent severe drought," the report said.
IMF forecast the gross domestic product to expand 2.2 percent this year, slower than 2.5 percent last year.
Inflation remained subdued as exchange rate dampened tradable price inflation. Wage pressures also remained contained. The headline consumer price index is seen rising marginally to 1.4 percent this year from 1.1 percent last year.
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Forex News
June 05, 2026 16:18 ET A busy week for economic news flow saw a slew of reports being released that reflected the trends in the U.S. labor market. In Europe, economic growth and inflation data gained attention as the European Central Bank and Bank of England head for policy session later in the month. In Asia, the monetary policy session of the Indian central bank was in focus as the country, a major oil importer, reels under the pressures of a weaker rupee and rising inflation.