2014.4.24
WELLINGTON: New Zealand’s central bank lifted interest rates for the second time in as many months today, saying it was necessary to contain inflation as an economic recovery gains momentum.
The Reserve Bank of New Zealand raised the official cash rate (OCR) 0.25 points to 3% in a well-flagged move that was widely anticipated by market watchers, who predict rates will hit 4.5% by the end of next year.
The hike comes after New Zealand last month became the first advanced economy to tighten monetary policy since 2012, ending a three-year freeze when the benchmark rate rose to 2.75% from a record low of 2.5%.
Reserve Bank governor Graeme Wheeler said New Zealand’s farm-based economy “has considerable momentum” and grew an estimated 3.5% in the year to March, fuelled by high commodity prices and a strong housing market.
As a result, Wheeler said inflationary pressures were increasing and action was needed to keep price rises within the bank’s 1%-3% target range over the next two years.
“By increasing the OCR as needed to keep future average inflation near the 2% target mid-point, the bank is seeking to ensure that the economic expansion can be sustained,” he said in a statement.
The bank kept rates low for three years to cushion the impact of the devastating Christchurch 2011 earthquake, which claimed 185 lives and flattened much of the South Island city.
But with a NZ$40 billion (US$34.5 billion) rebuilding programme stimulating the construction sector and farm exports to China booming, Wheeler has repeatedly spoken of the need to move rates to a “neutral” setting.
TD Securities head of Asia-Pacific research Annette Beacher said the central bank was clearly hawkish about the need for further rate increases.
“With the hike and tone (of the statement) as we expected, we remain with our OCR base case of a 75 basis point rise to 3.75% by year end and targeting new neutral 4.5% by end-2015,” she said.
ANZ chief economist Cameron Bagrie predicted the OCR would peak at 5% by the end of 2015, with the main variable being how quickly the bank decided to lift the cost of lending.
“Wheeler is leaving himself some wiggle room on the exact speed of tightening – as always, it’s conditional on emerging data and inflation pressure,” he said.