RBNZ Raises Official Cash Rate To 2.75%

(RTTNews) - The Reserve Bank of New Zealand said on Thursday that it increased its Official Cash Rate by 25 basis points to 2.75 percent, marking the first rate hike in more than three years.

The decision was in line with expectations after 24 straight meetings in which the rate was not changed.

"New Zealand's economic expansion has considerable momentum, and growth is becoming more broad-based. GDP is estimated to have grown by 3.3 percent in the year to March. Growth is gradually increasing in New Zealand's trading partners. However, improvements in major economies have required exceptional support from monetary policy. Global financial conditions continue to be very accommodating," Reserve Bank Governor Graeme Wheeler said in a statement that accompanied the decision.

The OCR has been unchanged for more than three years; the RBNZ pared the rate from 3.00 percent on January 27, 2011 in an attempt to spur the economy.

But the central bank had plainly said it would begin raising the rate in early 2014, since it was pleased with the rate of recovery.

"Confidence is very high among consumers and businesses and hiring and investment intentions continue to increase. Prices for New Zealand's export commodities remain very high, and especially for dairy. Domestically, the extended period of low interest rates and continued strong growth in construction sector activity have supported recovery," Wheeler said.

The bank also wishes to keep overall inflation close to its target of 2.0 percent; in 2013, CPI was up 1.6 percent and trending to the upside.

"While headline inflation has been moderate, inflationary pressures are increasing and are expected to continue doing so over the next two years. 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 Bank is commencing this adjustment today," Wheeler said.

The RBNZ governor also hinted that this will not be the only rate hike to the OCR - merely the first, although the pace of the increase will be determined by the trend of economic data.

"It is necessary to raise interest rates towards a level at which they are no longer adding to demand. The Bank is commencing this adjustment today. The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures. By increasing the OCR as needed to keep future average inflation near the 2 percent target mid-point, the Bank is seeking to ensure that the economic expansion can be sustained," Wheeler said.