WELLINGTON, Sept 12 (Reuters) - New Zealand's central bank adopted a more hawkish monetary policy stance on Thursday, signalling that interest rates would start to rise by mid-2014 and sending the domestic currency scurrying to a four-week high.
The Reserve Bank of New Zealand, which held the official cash rate at a record-low 2.5 percent as expected, raised its outlook for 90-day bank bill rates to 3.0 percent in the June 2014 quarter, indicating that rates may rise by 25 basis points by that time.
This would be sooner than the September quarter implied in its previous statement, while RBNZ projections now factor in a faster pace of monetary tightening in 2014, bringing the total number of rate rises next year to three, from two previously.
The New Zealand dollar jumped to $0.8131, its highest level since mid-August, from around $0.8090 before the release of the quarterly Monetary Policy Statement. Interest rate futures <0#NBB:> fell by up to 8 points.
"(Official cash rate) increases will likely be required next year," RBNZ Governor Graeme Wheeler said in a statement, while repeating his pledge to keep rates unchanged in 2013.
"The extent and timing of the rise in policy rates will depend largely on the degree to which the momentum in the housing market and construction sector spills over into broader demand and inflation pressures."
Economists said they were surprised by the hawkishness of the statement, given that the RBNZ only last month introduced limits to low-deposit mortgage lending to rein in the hot housing market and buy time before pulling the trigger on rate rises.
"We did anticipate the RBNZ would incorporate an impact of the loan-to-value-ratio restrictions and that would broadly offset the other looming pockets of inflation but the bank has come out with an even higher interest rate outlook," said Nick Tuffley, chief economist at ASB Bank.
Wheeler also noted that long-term global rates had risen in past months as investors have dumped assets in emerging economies due to uncertainty about when the U.S. Federal Reserve may start to remove monetary stimulus as the economy recovers.
He added the tapering process could take off some upward pressure in the New Zealand dollar, which scaled a post-float high against a currency basket earlier this year.
"One would hope that as tapering starts to be put into operation that we will see the U.S. exchange rate potentially pick up. and that hopefully will start to ease some of the pressure on the New Zealand dollar exchange rate," Wheeler told reporters.
The RBNZ has been balancing an improving economy and an elevated housing market with subdued inflation pressures and a historically high exchange rate.
The economy has been bolstered in the past year or so by earthquake reconstruction projects in the Canterbury region.
While drought conditions earlier this year weighed on growth in the first half, the RBNZ expects annual GDP to come in around 2.5 percent for 2013, before expanding further to peak at 3.0 percent in 2015.
Rising house prices in the country's largest city of Auckland and in Christchurch, which is enjoying a reconstruction boom following the 2011 earthquake, are a headache for the central bank, which fears they will spill over into broader price pressures.
Annual inflation slowed to 0.7 percent in the second quarter, its lowest in nearly 14 years and well below the central bank's target band of 1 percent to 3 percent.
The central bank expects annual inflation to pick up to 1.4 percent next year, thanks to an ongoing pick-up in earthquake reconstruction activity and forecasts for a bumper season for the country's dairy industry. (Reporting by Naomi Tajitsu; Editing by Shri Navaratnam)