REFILE-UPDATE 2-Strong NZ dollar may delay start of c.bank's rate hikes next year
(Refiles to add dropped words in paragraph 8)
* RBNZ sees higher rates in 2014
* Currency strength may influence size, timing rate hikes
* Household spending up, inflation pressures increasing
WELLINGTON, Oct 31 (Reuters) - New Zealand's central bank said on Thursday the strength of the nation's currency will influence the speed and magnitude of interest rate rises next year, casting doubt over a March start to the tightening cycle forecast by economists.
Economists said a stronger currency might take some of heat off the RBNZ to raise rates, but uncertainty over when the U.S. Federal Reserve will start withdrawing stimulus was muddying the water.
"The longer until tapering starts the greater the potential for the NZ dollar to remain firm, and the greater the risk the RBNZ keeps the official cash rate on hold for longer," said Nick Tuffley, chief economist at ASB Bank.
Reserve Bank of New Zealand Governor Graeme Wheeler confirmed that rate rises are coming next year, but added that the kiwi dollar will be an influential factor in determining the timing of the rate-hike cycle.
"Sustained strength in the exchange rate that leads to lower inflationary pressure would provide the Bank with greater flexibility as to the timing and magnitude of future increases in the OCR," Wheeler said in a statement accompanying the bank's decision to hold the official cash rate at a record-low 2.5 percent as expected.
With the economy picking up the pace in recent quarters and the Federal Reserve delaying a start to tapering its stimulus, the New Zealand dollar rose to a five-month high in October, helping to temper imported inflation.
Annual inflation stood at 1.4 percent in the third quarter, the highest in more than a year and the RBNZ has said it sees it heading back to the middle of its target band of 1 percent to 3 percent over the coming year.
The improving outlook for the $180 billion economy keeps New Zealand on track to be the first developed nation to raise rates.
A Reuters poll taken after the RBNZ statement was still firmly picking March as the start of the tightening cycle, but several forecasters pushed out their calls by one or two RBNZ reviews.
"It is our view that the NZ dollar does hold up so we feel forced to push out our first tightening (forecast) to June," said Bank of New Zealand head of research Stephen Toplis, who had previously been picking a March start.
Even those holding to an early tightening start were wary, especially given the pick up in the economy and strength of the housing market.
"We're closely watching our monthly inflation gauge: should we see subdued readings in the coming months we'll shift our first hike call from March to June," said ANZ chief economist Cameron Bagrie.
The New Zealand dollar rose as high as $0.8277 from $0.8237 before settling at around $0.8250. Interest rate futures <0#NBB:> were up to 3 ticks lower.
Financial market pricing based on interest rate swaps indicated virtually no chance of a rate rise in December and 79 basis points of rate rises over the next 12 months, little changed from before the latest statement.
The RBNZ estimated the economy grew by more than 3.0 percent in the year to September, with household spending rising, and strength from earthquake reconstruction projects in the Canterbury region spreading elsewhere.
Data released after the RBNZ statement showed a modest lift in new housing consents in September, while business sentiment held close to 14 year highs.
Wheeler repeated that the RBNZ expects recently imposed limits on low deposit lending to slow house price inflation, although more generalised inflation pressures were strengthening.
"The Bank is aiming to keep inflation and inflation expectations close to 2.0 percent over the medium term," he said.
(Editing by Shri Navaratnam)