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RBNZ says inflation not an issue for now

Reuters - Tuesday, June 30

* NZ central bank says focused on stability

* RBNZ says inflation not an issue for now

* Inflation to become a challenge when confidence returns

WELLINGTON, June 30 - New Zealand's central bank is more concerned with ensuring stability in the economy and financial system than combatting inflation in the current environment, it said in its annual planning statement on Tuesday.

However, inflation could become a challenge when confidence has returned to the financial markets, the Reserve Bank of New Zealand said in its Statement of Intent, which outlines its plans for the next three years.

"Inflation is less of a concern just now, but may present an important challenge once confidence returns to global markets, given the large amount of liquidity that has been injected into the global system," said RBNZ Deputy Governor Grant Spencer in a statement.

The comments are in line with the RBNZ's position that interest rates will remain at current record low levels at least until the latter part of 2010 to help foster recovery in an economy that has been mired in recession since early 2008.

The central bank to cut its cash rate by 575 basis points since July last year to a record low of 2.5 percent, before it paused earlier this month.

Annual inflation in New Zealand fell back inside the central bank's 1-3 percent target band in the first quarter, with the consumer price index up 0.3 percent in the three months to March taking the annual inflation rate down to 3 percent.

The RBNZ has pumped extra cash into the financial system through expanding the range of securities it accepts as collateral for loans.

"But we have been spared the necessity of zero interest rates, massive capital injections to shore up banks and companies, and unorthodox quantitative easing measures that have occurred particularly in the U.S. and Britain," the report said.

"How long recovery will take is uncertain, though it is likely that it will be some significant time before economic activity returns to robust and healthy levels."

The RBNZ also warned that the spread of the H1N1 flu virus would likely impact the economy, and might delay recovery. (Reporting by Mantik Kusjanto and Adrian Bathgate; Editing by James Thornhill)

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