By Stella Qiu
WELLINGTON, Feb 19 (Reuters) - New Zealand's central bank believes inflation will slow back to target this quarter, its governor said on Thursday, but stands ready to tighten policy sooner should a stronger economy encourage firms to raise prices more broadly.
The RBNZ kept its main official cash rate at 2.25% on Wednesday and said monetary policy would stay accommodative for some time. Reserve Bank of New Zealand Governor Anna Breman later said the central bank was not planning rate hikes
until inflationary pressure increases and the economy grows.
The decision to hold was her first since becoming governor in December and comes as policymakers try to balance a nascent economic recovery against above-target inflation.
Speaking before a parliamentary committee, Breman said headline inflation at 3.1% last quarter was too high, but that was mostly due to volatile tradable items and should come back to the target band of 1% to 3% this quarter.
"If it is another quarter when inflation is above the target band and if it is clearly very volatile items and we have good reasons to believe that they will fall out the data, we might not need to tighten sooner," said Breman.
"But if it is the case that we see that this is actually something in price setting behaviour... we can see that would mean that economy will be stronger going forward, and it can sustain higher interest rates then we would act and talk about tightening earlier."
The revised OCR track, however, suggested some possibility of a rate hike by the end of the year, which was more dovish than markets had expected. Swaps are now fully pricing in a rate hike in December, from October before the decision.
One member of the Monetary Policy Committee noted that if the economy recovers as expected, monetary stimulus could be withdrawn earlier than that, while another member noted raising rates too quickly might encourage firms to increase prices further.
Breman said the discussions centred on how firms may adjust their pricing behaviour as the economy rebounds.
"It is uncertain, and we have to be humble in saying that we can't know with 100% certainty exactly how firms will behave in the cycle."
(Reporting by Stella Qiu in Wellington and Renju Jose in Sydney; Editing by Franklin Paul and Lisa Shumaker)
