WASHINGTON, March 31 (Reuters) - The New Zealand dollar is currently overvalued by 10 to 25 percent, the International Monetary Fund said on Wednesday.
In a statement at the end of consultations with authorities, the IMF said the overvaluation of the currency may be temporary and the exchange rate may depreciate as the interest rate differential narrows with eventual tightening by the U.S. Federal Reserve.
At the current level of the exchange rate, the IMF said New Zealand's current account deficit would likely widen to over 8 percent of gross domestic product by 2015.
The Fund said the economic recovery underway in New Zealand would probably continue, with accommodative fiscal and monetary policies supporting domestic demand.
The biggest risks to the outlook were if the global economic rebound stalled and Chinese demand dropped sharply, it added.
The Fund forecast New Zealand's economy would grow at about 3 percent in 2010 and 2011 before falling back to its potential of around 2-1/3 percent. Meanwhile, the unemployment rate would likely lag the recovery and peak at 7.5 percent this year, it added.
The IMF cautioned that New Zealand's medium-term outlook had worsened because of income tax cuts. As a result, cash budget deficits of about 3 to 6 percent of GDP are projected over the next four to five years.
It called for further spending restraint to return to surpluses earlier than planned.
The mission recommends returning the budget to surplus by 2014, unless the downside risks to growth materialize, it said This would achieve the 20 percent of GDP net debt target at an earlier date.
Turning to monetary policy, the IMF said it supports the authorities' current accommodative monetary stance and the central bank's plan to gradually return to more neutral rates once the recovery is well underway.
It said inflation would likely remain within the central bank's 1 to 3 target albeit at the higher end of that range.
(Reporting by Lesley Wroughton; Editing by Andrew Hay)