New Zealand's central bank has kept its official interest rate unchanged at 2.5 percent, a historic low, as the bank sees both "upside and downside risks" to the country's economic outlook.

The bank noted that the rate will stay the same until the end of 2013.

The Official Cash Rate (OCR) has been staying at 2.5 percent since March 2011 as the bank felt the country's economic recovery was uneven. Economists also expected the bank to keep the rate on hold.

"The downside risks around global growth have receded in recent months, and financial market sentiment has improved," the Reserve Bank of New Zealand Governor Graeme Wheeler said in a statement.

"While demand and output are expanding, the labour market remains weak. Economic growth and inflation are being shaped by a range of forces".

Further, residential investment and business and consumer confidence have been increasing in the country. Meanwhile, house price inflation has increased and Wheeler said that the bank did not want to see housing demand get too far ahead of supply.

The country's two largest cities, Auckland and Christchurch, are facing housing shortages at present. The demand for houses in Auckland has continued to increase due to its expanding population, while Christchurch need to replace the 10,000 homes destroyed in a series of earthquakes affected the region.

"The overvalued New Zealand dollar is undermining profitability in export and import competing industries, and worsening drought conditions are creating difficulty in much of the country. Ongoing fiscal consolidation will also act to slow overall demand," he said.

The central bank expects the economy to grow at an annual rate of between 2 and 3 percent over the forecast period, while inflation is projected to rise gradually towards the 2 percent midpoint of the target range.

"There are both upside and downside risks to this outlook. At this point we expect to keep the OCR unchanged through the end of the year," Wheeler added.

Following the news, the New Zealand dollar tumbled against the US dollar, and is trading at 81.76 cents, down 0.10 percent as at 12.27am ET.