Reserve Bank of New Zealand Thursday raised the official cash rate by 25 basis points to 2.75% for the first time since March 2011, with the aim of ensuring inflation stays near the 2% target band as the economy continues to expand.
“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,” RBNZ Gov. Graeme Wheeler said in a statement.
In what Westpac New Zealand senior economist Michael Gordon called “the most well signalled rate rise in the RBNZ’s history” Wheeler said the strength of the economic recovery means the stimulus from low interest rates is no longer necessary.
“Inflationary pressures are increasing and are expected to continue doing so over the next two years,” Wheeler said.
“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,” he said. “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.”
The central bank, however, increased by 20 bps its projected rate for the 90-day bank bill, starting from the next quarter. The current forecast is for 3.3% in the June quarter, rising to 4.8% by December 2015. The last forecasts were for 3.1% in the June quarter, rising to 4.6%.
It also raised its GDP growth estimate for the current year to September compared to the last monetary policy statement, three months ago, to 3.4% from 2.9%.
This is largely due to a previously anticipated fall in the terms of trade now not being expected, the RBNZ said. Terms of trade, “while moderating, will remain elevated by historical standards.”
Because of this, the RBNZ also revised its exchange rate track upwards: the trade-weighted index is now forecast to stay above 75.5 through to the end of 2016, instead of previous expectations it would fall back towards the 70 mark.
However, Wheeler said the high exchange rate “is not sustainable in the long run.”
The housing market, meanwhile, is slowing, having been a long standing bugbear for the Bank.
“There has been some moderation in the housing market,” he said.
Restrictions on high loan-to-value ratio mortgage lending are starting to ease pressures, and rising interest rates will have a further moderating further, the RBNZ said.