The Reserve Bank of New Zealand on Thursday raised its Official Cash Rate (OCR) by 25 basis points to 3.5 percent, saying it was important to contain inflation expectations despite signs that the pace of economic growth might be slowing.
Reserve Bank governor Graeme Wheeler also warned that the New Zealand dollar was unsustainably overvalued and signaled that the OCR -- after four consecutive rises of 25 basis points this year -- might be held in the near future.
Wheeler said the economy was expected to grow at an annual pace of 3.7 percent over 2014, with global financial conditions remaining "very accommodative" with low interest rates, narrow risk spreads and low financial market volatility.
Construction, particularly in the earthquake-battered Canterbury region, was growing strongly, while strong net immigration was adding to housing and household demand, although house price inflation had moderated since the last OCR rise in June.
"Over recent months, export prices for dairy and timber have fallen, and these will reduce primary sector incomes over the coming year. With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall," Wheeler said in a statement.
"Inflation remains moderate, but strong growth in output has been absorbing spare capacity. This is expected to add to non- tradables inflation. Wage inflation is subdued, reflecting recent low inflation outcomes, increased labor force participation, and strong net immigration," he said.
"It is important that inflation expectations remain contained." he added.
The latest OCR rise would help keep future average inflation near the 2 percent mid-point of the Reserve Bank's target range of 1 percent to 3 percent and ensure that the economic expansion could be sustained.
"Encouragingly, the economy appears to be adjusting to the monetary policy tightening that has taken place since the start of the year. It is prudent that there now be a period of assessment before interest rates adjust further towards a more neutral level, " said Wheeler.
The next review of the OCR will be announced on September 11.
