WELLINGTON, May 15 (Reuters) - New Zealand's central bank may have to raise interest rates to cope with a surging housing market, while an overvalued currency will likely fall if global loose money policies are reduced, the International Monetary Fund said on Wednesday.
The IMF annual report on the South Pacific agricultural economy said the housing market might be as much as 25 percent overvalued, and the recent rise to record prices was raising risks of higher debt loads and a sharp price correction.
'The current accommodative monetary policy stance is appropriate, but may need to change if house price and credit expansion begin to fuel excessive consumption spending and inflationary pressures,' the IMF report said.
Industry data this week showed a 9.8 percent rise in a house price index in April on a year earlier, with the biggest city Auckland leading the way.
The IMF said the central bank should be ready to apply its planned macro-prudential tools, such as loan to value ratios, capital buffers, and increased reserves, to keep house price inflation in check.
'These measures are untested, however, and there are questions about how effective they will be given possibilities of evasion and arbitrage.'
The RBNZ repeated its concerns about the risks of the strong housing market last week in its bi-annual financial stability report and took a first step to control the sector by making the big four banks increase their reserves for high value loans.
The IMF annual report said New Zealand was growing below trend but picking up.
It forecast average GDP growth of about 2.5 percent over the next five years, tame inflation, unemployment above 5 percent, and a current account deficit above 6 percent of GDP.
Finance Minister Bill English said the IMF report backed the government's tight control on spending, move to cut debt and get back into budget surplus.
'The IMF endorses New Zealand's balanced and pragmatic economic management,' he said in a statement.
English presents the annual budget on Thursday, which is likely to forecast rising growth, reduced borrowing, and a return to the black in 2014/15 with a bigger than expected surplus.
The IMF repeated comments made by its officials when they visited in March that the New Zealand dollar is overvalued by as much as 15 percent, which was likely to continue, given loose monetary policy globally.
'If global monetary conditions were to become less stimulatory, the exchange rate would likely depreciate over time, reducing the current account deficit over the medium term,' the IMF said.
(Reporting by Gyles Beckford; Editing by Jacqueline Wong) Keywords: NEWZEALAND ECONOMY/IMF
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