WELLINGTON, March 13, 2014 (AFP) - New Zealand on Thursday became first advanced economy to raise interest rates since 2012, ending a three-year freeze imposed after the devastating Christchurch earthquake.
In a widely anticipated move, the Reserve Bank of New Zealand hiked the official cash rate (OCR) 0.25 points to 2.75 percent, saying it no longer needed to be kept at a record low because the economy's expansion "has considerable momentum".
The bank's governor Graeme Wheeler signalled further rises to come, as it looks to keep a lid on inflation and return the cost of borrowing to "normal" levels. The move sent the New Zealand dollar to a five-month high against the greenback.
"The bank's assessment is that the Official Cash Rate will need to rise by about two percentage points over the next two years for inflation to settle," he said.
"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 6.3-magnitude Christchurch earthquake in February 2011 levelled much of New Zealand's second largest city, claiming 185 lives and prompting the bank to slash rates in an emergency move to protect the economy.
Since then, New Zealand has experienced strong growth thanks to a booming housing market, growing global demand for primary products such as dairy, and a NZ$40 billion (US$33.9 billion) programme to rebuild the shattered South Island city.
But the massive construction spending has fuelled inflation, potentially sending it beyond the bank's 1.0-3.0 percent target band.
Prime Minister John Key, facing a general election in September, suggested this week that a rise in interest rates represented a vote of confidence in the economy from Wheeler.
"It means that he is confident the economy is rebounding and rebounding strongly - both the Treasury and the Reserve Bank now have growth sitting at around four percent," he said.
Capital Economics analyst Gareth Leather said the hike made New Zealand the first advanced economy to lift interest rates since 2012.
He expected the OCR to rise to 3.25 percent by the end of the year, noting that most economists were tipping it will reach a notch higher at 3.5 percent.
'Rock star economy'
Westpac New Zealand chief economist Dominick Stephens forecast the OCR would reach 5.5 percent by late 2016.
He did not believe New Zealand's move would be followed in other advanced economies, saying the earthquake rebuild and the country's strong terms of trade - the price that other countries pay for its exports - made it a special case.
"New Zealand is exceptional in that sense, it's forging its own path," he said.
Gross domestic product expanded 2.6 percent in the 12 months to December and analysts expect 3.5-4.0 percent growth this year.
The benchmark NZX-50 ended 0.30 percent, or 15.45 points, higher at 5,111.98 after the rate rise, while the New Zealand dollar jumped to 85.60 US cents, its highest level since October.
The stock index reached record highs last week on the back of a strong earnings season, while consumer and business confidence are both on the rise.
The optimistic outlook prompted HSBC's chief economist for Australasia Paul Bloxham this year to dub New Zealand "the rock star economy for 2014".
He said a major factor behind the assessment was China's enormous demand for New Zealand dairy products, which shows no sign of abating despite an infant formula contamination scare last year.
However, Green Party co-leader Russel Norman said if rates continued to rise over the next 12 months as predicted, it could cost up to 30,000 jobs.
"Rising interest rates mean less household spending, reduced business investment, and a higher exchange rate - all of which mean fewer jobs," he said.
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