The wholesale interest rate has been left unchanged at a record low 0.25 percent, as new strains of COVID-19 bring added risk to the economy.
In its first Monetary Policy Statement of the year, the central bank said New Zealand’s economy had picked up, however risks remained until populations were vaccinated.
"The economic outlook ahead remains highly uncertain, determined in large part by any future health-related social restrictions," the statement said.
Its updated forecasts showed a contraction in economic activity this year, before a rebound to pre-pandemic levels in 2022.
It expected house price growth to decline this year, as it reinstates tough lending restrictions on home buyers on Monday.
Banks would be limited to giving no more than 20 percent of all new home loans to riskier first home buyers with less than a 20 percent deposit. Almost all property investors would be required to stump up 30 percent deposits.
The loan-to-value ratio restrictions were removed last year in an effort to keep money flowing from banks during the pandemic and stop a correction in house prices.
Instead, prices unexpectedly rose 19 per cent in the past 12 months, according to the Real Estate Institute.
Banks loaned record amounts to first home buyers and investors, to a total of $9.6 billion in the month of December.
Risks in the financial system remained, with more than 11,000 homeowners missing mortgage repayments in the first week of January, an increase of 8 per cent on the week before. Business owners missed 12,000 payments, an increase of 20 percent.
Hundreds were still paying interest only, or had deferred repayments completely, Reserve Bank data showed.
Economists said Wednesday’s Monetary Policy Statement was largely as expected, with no changes to policy settings. New Zealand's economy has proven to be resilient and economic forecasts have been revised higher. But there's still uncertainty.
Current policy settings won't change until the Reserve Bank has greater confidence that its objectives of near 2 percent inflation and maximum sustainable employment are met.
Below, Newshub takes a closer look at what impact loan-to-value (LVR) restrictions might have on house prices and when interest rates might start to rise.
Loan-to-value restrictions and house prices
The combined effects of bringing LVR restrictions back in, low net migration due to closed borders and low interest rates having less impact are expected to dampen house price growth.
The Reserve Bank expects annual house price growth to slow, from 22 percent in mid-2021 to 5.6 percent in 2023.
It said temporarily removing loan-to-value (LVR) restrictions had contributed to increasing house prices and boosted construction activity and retail spending.
Back in from March 1, LVR restrictions will reduce the amount of higher-risk borrowing, particularly by investors. The full impact is expected to show over the coming months.
Kiwibank chief economist Jarrod Kerr says as record-low interest rates and a shortage of affordable homes have fuelled a property market frenzy, more needs to be done.
He says weightings could be introduced on higher-risk loans to support lower interest rates for first-home buyers and owner-occupiers. Lower lower risk weightings for small businesses could encourage them to invest.
"We need to be charging investors and people who want to go on interest only, a higher interest rate...at the same time, we could offer first-home buyers a lower interest rate," Kerr says.
"I also think variable [floating] mortgage rates need to come down."
Interest rates outlook
Economists don't expect much change to interest rates in the short term.
Releasing ASB's quarterly economic forecast on Monday, chief economist Nick Tuffley said rising inflation and faster-than-expected economic recovery brought bank forecasts of a cash rate rise forward a year, to August 2022.
"In the here and now, wholesale interest rates aren’t really changing...there’s still uncertainty and rates will stay low for a long period," Tuffley says.
Kiwibank chief economist Jarrod Kerr doesn't expect the OCR to start rising until November 2022, as keeping interest rates low is still a priority for businesses and first-home buyers.
Infometrics chief economist Brad Olsen also expects the Reserve Bank to keep interest rates on hold until solid signs of economic growth appear and business investment increases. Meanwhile, the Large Scale Asset Purchase (LSAP) programme (and Funding for Lending (FLP) programme (a cheap source of funding for banks), are still working to keep interest rates low.
The Reserve Bank expects unemployment (currently 4.9 percent) to peak at 5.2 percent in the middle of this year, falling to 4.6 percent by March 2024.
Reflecting high cost pressures including supply chain disruption, inflation is expected to reach 2.5 percent in the short-term before falling in 2022 and lifting towards 2 percent in 2024.