Reserve Bank Governor Adrian Orr says the central bank's "best foot forward" is to "edge" the official cash rate north of 3 per cent over the next 12 months or so.
Orr spoke to Breakfast on Thursday after the bank raising the OCR by 0.25 basis points to 1 per cent on Wednesday.
He explained the bank's task is to keep consumer price inflation low and stable through time.
With inflation forecast to rise above 6.6 per cent this year, Orr said it was "critical" the bank bring this back down to 1-3 per cent. The OCR plays a role in this.
READ MORE: Reserve Bank lifts official cash rate to 1%
“We don’t want current inflation to be embedded in people’s expectations because that would be wrong, it would be costly for all, so we need to take some of the heat out of the economy by raising interest rates.”
Orr said the biggest welfare cost to happen to people is not volatile house prices, but ingrained consumer price inflation.
"It's time to cool," Orr said. "A 3 per cent OCR, we're more or less taking our foot off the accelerator, rather than slamming it on the brakes."
Orr's message to renters who are wanting to buy their own home was: “Well I would say there’s a lot more light at the end of the tunnel for them now because with slightly higher interest rates, that will dampen asset prices.
"We ourselves are projecting a 10 per cent decline in the level of house prices over the next couple of years.
"I’m more confident in the direction, the pace, than what the actual end point will be, but that means more affordable houses. It would mean house prices are more sustainable. They will better reflect the underlying economic supply and demand rather than the hype and excitement that has happened around asset prices…”
SHARE ME