(Updates with comments from interview with assistant governor John McDermott in grafs 14-16)
By Charlotte Greenfield and Jane Wardell
WELLINGTON, Feb 9 (Reuters) - New Zealand's central bank governor warned on Thursday the "protectionist risk" posed by the Trump administration is a major hazard, as it held the official cash rate steady at 1.75 percent, and flagged it could remain there for two years or more.
The Reserve Bank of New Zealand appeared to have its eye squarely on external factors, including China's debt levels, and their impact on the NZ dollar.
"The biggest risk I think is the protectionist risk," RBNZ Governor Graeme Wheeler told reporters at a press conference. "It's unfortunate that a lot of this rhetoric is taking place at a time when we've seen the slowest growth in merchandise trade volumes in the past five years seen since the early 1980s."
U.S. President Donald Trump's declarations in favour of protectionism have alarmed politicians and businesses across Europe, South America and Asia. Trump has threatened to impose punitive tariffs on imports from China and Mexico as well as "border taxes" on goods coming from Europe, blaming lax trading regulations for U.S. job losses. Zealand, which is heavily reliant on international trade, was a key backer of the Trans-Pacific Partnership (TPP)abandoned by Trump.
"Let's say for example the U.S. really did get serious about imposing 45 percent tariffs on China for example or large tariffs on Mexico," Wheeler said. "That would have serious implications, I believe, for the global economy."
China is New Zealand's largest trading partner.
Wellington is focusing on getting a number of new trade deals and existing pact upgrades off the ground, including one with the European Union.
New Zealand's Ministry of Foreign Affairs and Trade (MFAT)said on Thursday it had set up a task force to deal with the rapid-fire announcements from the Trump Administration.
MFAT head Brook Barrington told a parliamentary inquiry the task force is being run by six or seven people, who monitor and brief officials on developments 24 hours a day.
NZ ECONOMIC GROWTH
Wheeler said the bank had adopted a neutral policy stance, having previously been in an easing mode after cutting the OCR three times last year.
The bank's official forecasts did not show a rise in rates to 2 percent until March 2020. Markets had been pricing in a rise around late 2017 or early 2018 and quickly moved to push that out by a few months.
"There's a signalling element to this. They are clearly concerned about the dollar," Phil Borkin, senior economist at ANZ, told Reuters.
Assistant Governor John McDermott later told Reuters in an interview that the market's reaction to the rate decision was "exactly what we wanted" and the bank was "not trying to fake the market on the kiwi" with its policy outlook. local dollar was down a full cent on the day and hit a new 2-1/2 week low of $0.7194 after McDermott's comments to Reuters. NZD=D4
McDermott said the bank's focus had shifted to external risks, including U.S. protectionism, and away from domestic issues as the local economy grows faster than almost any other developed nation.
Record migration, strong consumer spending and a boom in home building has all combined to support activity. The dairy industry, New Zealand's major goods exporter, also enjoyed a recovery in prices recently.
Inflation, however, has been uncomfortably low. After reaching only 0.4 percent for most of last year, it achieved 1.4 percent in December, just inside the RBNZ's target band of 1 to 3 percent.
Wheeler said inflation was expected to return to the midpoint of the target band only "gradually." Indeed, the bank's official forecasts did not see inflation reaching 2 percent until June 2019.
The governor sounded a little less concerned about house prices which have been running too hot for comfort in some parts of the island nation, noting there had been quite a moderation in house prices in the past few months.