Reserve Bank Governor Alan Bollard says future monetary policy decisions will have to account for any increase in retail interest rates and the looming construction boom in Christchurch.
Speaking at the Canterbury Employers' Chamber of Commerce, Dr Bollard said Europe's sovereign debt crisis is increasing international bank funding costs, which will probably lead to higher retail interest rates locally.
That means the central bank will have to "take account of such pressures" when making future decisions on the level of the official cash rate (OCR).
In the December monetary policy statement, the bank flagged higher funding costs as a "particular concern" as interest rates would move independently to the OCR.
On top of that, Dr Bollard said the Canterbury rebuild is likely to create similar demand to the mid-2000s housing boom, leading to a sharp rise in residential and non-residential property investment.
"Spare capacity and labour will be absorbed rapidly, and inflation pressures will pick up from current low levels," he said.
"We will need to keep monitoring this to judge whether the level of the OCR continues to be appropriate."
The "high degree of uncertainty" over Canterbury's rebuild was taken into account in Thursday's OCR review, and the central bank expects work won't begin in earnest until 2013.
Dr Bollard kept the official cash rate on hold at record low 2.5 percent.
But he's upbeat about the way New Zealand's financial system has weathered Europe's deepening debt woes and the Canterbury quakes.
"The challenge for all of us, policymakers and business people alike, in 2012 will be to deal with these `known unknowns', to get on with economic activity and to help Christchurch and New Zealand grow," he said.
NZN