Just as the chances of an interest rate rise here have receded, New Zealand got its second rate rise in just over a month this morning when the country’s central bank lifted its key rate to 3.0%.
The announcement came at 7 am this morning, Sydney time and was the second increase of 0.25% by the Reserve Bank of New Zealand in a month.
The news saw the Kiwi dollar jump half a cent to well past 86 US cents.
From what the central bank said in its statement, the rise was precautionary and aimed at making sure inflationary pressures do not take hold in the economy – even they were described in the statement as being "moderate" as we saw with the NZ March quarter consumer price data before Easter.
That showed the cost of living rose 0.3% in the quarter instead of the forecast 0.7%, with the strong NZ dollar helping keep a lid on cost pressures by holding down the prices of imported goods and products, such as fuel. The annual rate was 1.5% for the 12 months to the end of March.
And while dairy prices have fallen in recent months from their record highs (a bit like iron ore for Australia) and the booming housing sector has slowed somewhat, both are still delivering considerable stimulus to the economy as a whole, helped by the rebuilding of Christchurch.
The increase is actually a vote of confidence in the strength of the NZ economy’s expansion – as many Australian companies operating have shown in their recent interim reports. Companies such as Fairfax Media, Woolworths and the Commonwealth Bank all reported solid rises in sales and profits.
And from next week the other big banks – the ANZ, Westpac and NAB will all confirm how well their New Zealand operations have been doing.
Booming Kiwi economy, low inflation sees second rate rise in a month
In its statement, the RBNZ said the rate rise was made to "keep future average inflation near the 2 percent target mid-point, (and) to ensure that the economic expansion can be sustained."
" New Zealand’s economic expansion has considerable momentum, with GDP estimated to have grown by 3.5 percent in the year to March," the bank said.
"Growth is gradually increasing in New Zealand’s trading partners, but inflation in those economies remains low. Global financial conditions continue to be very accommodating.
"Prices for New Zealand’s export commodities remain very high, though auction prices for dairy products have fallen by 20 percent in recent months.
"Domestically, the extended period of low interest rates and strong growth in construction sector activity are supporting the recovery.
"Net immigration continues to increase, boosting housing and consumer demand.
"Confidence remains very high among households and businesses, and measures of investment and employment intentions are positive.
"Spare capacity is being absorbed, and inflationary pressures are becoming apparent, especially in construction and other non-tradable sectors.
"The high exchange rate remains a headwind to the tradables sector, and along with low import price inflation has been holding down tradables inflation. The Bank does not believe the current level of the exchange rate is sustainable.
"There has been some moderation in the housing market. Restrictions on high loan-to-value ratio mortgage lending are easing pressure, and rising interest rates will have a further moderating influence. However, the increase in net immigration is adding to housing demand.
"Headline inflation is moderate, but 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 speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures, including the extent to which the high exchange rate leads to lower inflationary pressure,” the RBNZ said in its statement.
