By Naomi Tajitsu
WELLINGTON, June 13 (Reuters) - New Zealand's central bank held interest rates at a record low 2.5 percent on Thursday for an 18th consecutive month as widely expected, and reaffirmed its pledge to keep rates unchanged through the end of the year.
The Reserve Bank of New Zealand (RBNZ) said rebuilding in the earthquake-hit Canterbury region and a pick-up in broad construction activity would help push annual economic growth to 3.5 percent by the second half of 2014, slightly above its previous forecast.
The central bank also renewed a warning about the risks of rapid house price inflation, but noted that the New Zealand dollar remained overvalued despite a recent sharp fall, creating a headwind for the economy.
'Given this outlook, we expect to keep the OCR (official cash rate) unchanged through the end of the year,' Governor Graeme Wheeler said in a statement.
The New Zealand dollar fell nearly half a cent to a low of $0.7937 before settling back around $0.7950. It has fallen about 8 percent from a 20-month high in April against a resurgent U.S. dollar.
Interest rate futures initially rose by up to 3 points but turned flat.
The central bank has held the official cash rate at 2.5 percent since April 2011, the longest period the rate has been left untouched.
Most economists polled by Reuters expect the RBNZ will raise rates by 25 basis points in the first quarter of 2014 as inflation pressures grow, driven by the earthquake rebuild and increased consumer activity as the housing market strengthens.
'We still see the risks as roughly balanced, with much depending on the housing market,' said ASB Bank senior economist Jane Turner.
'We still expect the first hike in March next year.'
The RBNZ said economic growth had recovered despite a drought at start of the year, which it estimated had shaved 0.5 percentage points from GDP in the first half of the year.
Inflation remained subdued, and would be around 0.9 percent this year, the bank said, below its 1-3 percent target band.
Wheeler said the RBNZ was ready to intervene in the currency market again if the NZ dollar strengthened, to take the 'tops off the peaks', but would not try to battle strength caused by strong capital flows.
Despite the high exchange rate and limited price pressures, the central bank has warned that increased price pressures spurred by higher house prices could force a rate rise.
Domestic house prices rose nearly 9 percent on the year in May according to industry data, pushing them to a record high, largely due to a supply shortage in Auckland.
Wheeler said he was looking at using planned macroprudential regulatory tools to cool the housing market, such as forcing banks to raise their reserves and restricting high loan-to-value ratio mortgage lending.
($1 = 1.2552 New Zealand dollars)
(Reporting by Naomi Tajitsu; Editing by Richard Pullin) Keywords: NEWZEALAND ECONOMY/RATES
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