New Zealand central bank leads way in raising interest rate

Cash rate lifted from record low to 2.75pc, with central bank flagging further rises over coming years amid broader-based economic growth

PUBLISHED : Thursday, 13 March, 2014, 3:35pm
UPDATED : Friday, 14 March, 2014, 6:08pm

New Zealand's central bank raised interest rates yesterday and signalled further rises as far out as early 2017, taking the lead among developed economies in tightening monetary policy as it tries to quell inflation pressures in a strong economy.

In a widely expected move, the Reserve Bank of New Zealand lifted its official cash rate to 2.75 per cent from a record low of 2.5 per cent.

"Inflation pressures are increasing and are expected to continue doing so over the next two years," RBNZ governor Graeme Wheeler said in a statement.

"In this environment, it is important that inflation expectations remain contained. To achieve this, it is necessary to raise interest rates towards a level at which they are no longer adding to demand."

The central bank raised its projection for future rate rises in the next two years. It said it saw considerable momentum in the country's economic expansion and that growth was becoming more broad-based after being concentrated around rebuilding projects after earthquakes in the Canterbury region.

The RBNZ raised its projection for economic growth next year to 3.5 per cent from 3 per cent in its previous statement. It increased its forecast for 90-day bank bill rates until early 2016, and said it expected rates to rise to about 5.25 per cent by March next year.

RBNZ projections showed the annual consumer price index rising to 2.1 per cent in early 2016, and Wheeler said the central bank would raise rates as necessary to keep inflation near its target midpoint of 2 per cent.

Wheeler has flagged the tightening for months, arguing higher rates were needed as the economy races ahead on strong commodity prices, the rebuilding of earthquake-hit Christchurch and strong domestic demand.

Before the RBNZ's decision, financial markets had fully priced in a quarter percentage point rate rise as well as a further full percentage point of tightening over the next 12 months.

The New Zealand dollar continued to trade at high levels, the central bank said. It said this remained a headwind to the economy, was unsustainable in the long run and was expected to gradually moderate.

"It's a pretty upbeat statement," RBC Capital Markets strategist Michael Turner said. "Even with the high currency and a slower housing market, they are confident the rest of the economy is gaining momentum."

The start of a tightening cycle puts New Zealand well ahead of central banks in major developed economies, which are still grappling with the aftermath of the financial crisis.

It also takes New Zealand rates above those in Australia for the first time in five years.

The Reserve Bank of Australia is expected to keep rates at a record low of 2.5 per cent for much of this year.