The Reserve Bank says if wage and price growth continues to slow, then an interest rate cut is on the cards.
Reserve Bank Governor Graeme Wheeler Photo: RNZ / Diego Opatowski
Inflation is expected to fall to about zero in the March quarter and remain low this year, due to the high dollar, low global inflation and recent falls in petrol prices.
But Reserve Bank governor Graeme Wheeler said with an economy growing at an annual rate of between 3 and 4 percent for the next two years, keeping rates on hold at 3.5 percent - perhaps for the next couple of years - was the prudent approach.
Excluding the temporary effects of falling fuel prices, Mr Wheeler said if inflation expectations, which have fallen below the Reserve Bank's target of 2 percent, continue to fall to the bottom of the 1 to 3 percent band, then he won't hesitate to act.
Financial markets are pricing in a 64 percent chance of a rate cut this year.
On the dollar, Mr Wheeler said a substantial depreciation was needed though he conceded it was difficult to achieve when many countries are cutting interest rates or introducing further money stimulus plans to revive their economies.