New Zealand’s booming economy has forced the country’s central bank to lift its key interest rate for a third time this year.
The Reserve Bank of NZ said this morning that its official cash rate had been raised 0.25% to 3.25%. The rate rise takes the RNBZ’s official rate to a five year high, and will boost average NZ home mortgage rates to around 6.25% to 6.50%.
With growth of around 4%, unemployment low, the housing boom slowing and activity generally buoyant, the increase seems aimed at making sure inflation doesn’t breakout in coming months.
The move will lift the value of the NZ dollar and close the gap with the Aussie dollar.
The news saw the Kiwi dollar rise this morning, while the Aussie dollar jumped from around 93.82 US cents to nearly 94 cents in the space of 15 minutes. The Aussie then turned down, falling by around a quarter of a cent as traders sold it off in the wake of the Kiwi rate rise.
The Aussie had traded up to 94.06 US cents overnight – the first time in two months that it had hit that level.
In a statement released this morning, the RBNZ said the move was made to ensure inflation can be kept close to 2% and ensure "the economic expansion can be sustained."
The rate rise was expected by most market forecasters.
The increase came despite a weakening in the previously soaring price of dairy products and a discernible slowing in the country’s housing boom.
RBNZ lifts interest rates again
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Today’s statement left open the question of another rate increase – judging by the comments in the statement it could come later this year.
The rise came despite the bank describing inflation at the moment as being "moderate", with price pressures expected to be low for some time.
But the RBNZ did say that while it expects inflationary pressures to rise, expectations "remain contain".
"New Zealand’s economic expansion has considerable momentum, with GDP estimated to have grown by around 4 percent in the year to June," the RBNZ started.
"Global financial conditions remain very accommodative and are reflected in low long-term interest rates and narrow risk spreads. Economic growth among New Zealand’s trading partners is gradually improving and global inflation remains low.
"Prices for New Zealand’s export commodities remain historically high, but their recent falls will reduce farm incomes over the coming year. A continued acceleration in construction in Canterbury, and more broadly, is supporting growth, together with strong net immigration flows that are adding to housing and household demand.
"Business and consumer confidence remains buoyant, as do businesses’ reported intentions to invest and to hire.
"While house price inflation remains high, the housing market has moderated since late last year when restrictions were applied to high loan-to-value ratio mortgage lending and when mortgage interest rates began rising.
"Fiscal consolidation continues to moderate demand growth, though by less than previously assumed. The exchange rate has not yet adjusted to weakening commodity prices, but is expected to do so. The Bank does not believe the exchange rate is sustainable at current levels.
"Headline inflation remains moderate and tradables inflation is expected to be low for some time. However, above-trend growth has been absorbing spare capacity and adding pressure to non-tradables inflation. These pressures are particularly evident in construction cost increases.
"Nevertheless, overall wage inflation remains moderate, reflecting recent low headline inflation, increased labour force participation and strong net immigration.
Inflationary pressures are expected to increase. In this environment, it is important that inflation expectations remain contained and that interest rates return to a more neutral level. The speed and extent to which the OCR will need to rise will depend on future economic and financial data, and its implications for inflationary pressures," the statement said.
