New Zealand's central bank said Thursday it would hold the official interest rate at a record low 2.5 percent and signalled the first rise was likely around the middle of the year.

Reserve Bank of New Zealand (RBNZ) Governor Alan Bollard said the New Zealand economy was recovering and growth should rise further through this year.

"Trading partner activity has recovered a little faster than expected," Bollard said.

"At the same time, risks around the global outlook have increased, although not to the extreme levels seen at the height of the (global financial) crisis," he added.

New Zealand slumped into recession at the start of 2008, emerging only in the second half of last year with weak growth of 0.2 percent in each of the last two quarters.

"We estimate the New Zealand economy grew at a stronger pace in the December and March quarters than in the prior two quarters," Bollard said.

The central bank estimates economic growth of 3.2 percent this year, rising to 4.2 percent in 2010, saying growth was expected to be subdued compared with previous recoveries.

Inflation is expected to rise from levels around two percent to around three percent because of rises in government charges and levies, it said.

Although household spending had risen, house sales and credit growth remained subdued, and business spending was weak despite improved confidence.

"We continue to expect to begin removing policy stimulus around the middle of 2010," Bollard said in an outlook that has been unchanged since late last year.

Bollard said high funding costs for banks had already created a tightening effect on interest rates.

"Hopefully that means we won't have to push rates to the sorts of levels we have seen in the past," he told a press conference.

ASB Bank chief economist Nick Tuffley said this suggested that rises in interest rates were likely to be in steps of 0.25 percentage points, rather than 0.5 points.

"We continue to expect the RBNZ to begin lifting rates in June. An important factor of timing is that the RBNZ has not softened its tone despite factors such as a slowing housing market," Tuffley said.