New Zealand central bank says policy needs to stay restrictive for some time

By Wayne Cole and Lucy Craymer

CHRISTCHURCH (Reuters) -Interest rates in New Zealand need to stay restrictive for some time to ensure inflation expectations become fully anchored again, a top central banker said on Friday, while emphasising they were not in a "mindset" to consider cutting.

In an interview with Reuters, Reserve Bank of New Zealand Deputy Governor Christian Hawkesby said inflation was on the path toward the centre of its 1% to 3% target band, but the central bank had to stay the course to be sure.

"We need to have confidence that inflation expectations and core inflation are all anchored back to that 2%," said Hawkesby. "We actually need to have a period of time where the economy's running below potential."

The RBNZ held its official cash rate at a 15-year high of 5.5% at its first policy meeting of the year this week and noted the risks around inflation were now more balanced.

It also projected rates would stay at current levels until the middle of 2025, though markets are wagering an easing could come later this year as inflation slows and real rates rise.

Recent data on retail sales showed a steep drop in real spending in the December quarter, which raised the risk the economy had already slipped back into recession.

Hawkesby said the output gap - the difference between the economy's actual output and potential output - was currently around zero if not a little negative, but it needed to remain that way to bring demand and supply into better balance.

"Policy is restrictive at the moment and that's working, so that's giving us confidence that inflation is coming down," said Hawkesby. "So we will be cutting at some time in the future, but there's just a lot of uncertainty about when that will be."

Governor Orr said in a speech in Christchurch that the most significant risks to New Zealand's economy were offshore rather than domestic including the slowing of China's economy and what that would mean for demand for New Zealand goods.

He added that productivity in New Zealand continued to be hurt by the country's lack of investment in innovation and capital.

"New Zealand is a terrible investor," he told the Business Canterbury lunch. "We are one of the capital shallow countries in the OECD."

New Zealanders have significant investment in the house market. Orr said while house prices were currently subdued, the central bank is forecasting 5% annual growth over the next three years.

(Reporting by Wayne Cole; editing by Jonathan Oatis and Stephen Coates)