N.Z. Raises Key Rate for Second Month as Recovery Gains Pace

Photographer: Brendon O'Hagan/Bloomberg

The Sky Tower, center, stands in the central business district behind the Viaduct Basin in Auckland, New Zealand. The economy “has considerable momentum” as the period of low interest rates and increased construction activity support the recovery, Wheeler said. Close

The Sky Tower, center, stands in the central business district behind the Viaduct Basin... Read More

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Photographer: Brendon O'Hagan/Bloomberg

The Sky Tower, center, stands in the central business district behind the Viaduct Basin in Auckland, New Zealand. The economy “has considerable momentum” as the period of low interest rates and increased construction activity support the recovery, Wheeler said.

New Zealand’s central bank increased interest rates for the second time in two months as an economic recovery gathers pace, and said it will assess the extent to which currency gains curb inflation.

“It is necessary to raise interest rates toward a level at which they are no longer adding to demand,” Governor Graeme Wheeler said in a statement in Wellington after increasing the official cash rate by a quarter percentage point to 3 percent, as forecast by all 15 economists in a Bloomberg News survey. The timing and scope of future increases “will depend on economic data and our continuing assessment of emerging inflationary pressure, including the extent to which the high exchange rate leads to lower inflationary pressure,” he said.

New Zealand’s dollar rose. The central bank revised up its estimate for growth in the year ended March 31 as soaring business confidence, exports and the NZ$40 billion ($34 billion) rebuild of earthquake-damaged Christchurch support the recovery. There are some signs Wheeler may not have to lift rates as quickly as he indicated last month. Inflation unexpectedly slowed in the first quarter as currency strength curbed the cost of imported goods.

More Hikes Forecast

“The high exchange rate seemed to shift higher in importance,” said Dominick Stephens, chief economist in New Zealand for Westpac Banking Corp. Still, Wheeler’s “acknowledgement of recent low inflation outturns was quite low-key,” Stephens said, adding he expects further rate increases in June, July and December.

New Zealand’s dollar climbed after the decision. It bought 86.12 U.S. cents at 10:20 a.m. in Wellington, up from 85.87 cents immediately before the statement.

The Reserve Bank of New Zealand earlier assumed the kiwi dollar’s trade weighted index would average 78.4 in the three months through March; it was at 80.1 today.

The currency “remains a headwind” for exporters, Wheeler said. “The bank does not believe the current level of the exchange rate is sustainable,” he said, reiterating his March comment while omitting the words “in the long run.”

The annual inflation rate eased to 1.5 percent in the first quarter from 1.6 percent in the final three months of 2013. The central bank expected it to increase to 1.7 percent.

Inflation Midpoint

Wheeler is focused on keeping inflation around the middle of a 1 percent to 3 percent target range. Last month, the RBNZ predicted it would reach the 2 percent midpoint by this quarter -- 18 months sooner than estimated in December.

“Headline inflation is moderate but inflationary pressures are increasing and are expected to do so over the next two years,” Wheeler said today. “It is important that inflationary expectations remain contained.”

New Zealand was the first developed nation to start raising rates this year. The RBNZ is removing monetary stimulus at the same time as the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan pledge to hold interest rates at record lows to spur lending and stoke their own economies.

The RBNZ today raised its estimate for growth in the year ended March to 3.5 percent from 3.3 percent.

New Zealand will post economic growth of 3.4 percent this year and 3 percent in 2015, according to a Bloomberg survey of 10 economists. Business confidence held at a 20-year high in the first quarter and exports rose 7.6 percent in February from a year earlier.

Rate Outlook

The economy “has considerable momentum” as the period of low interest rates and increased construction activity support the recovery, Wheeler said. Net immigration is boosting housing and consumer demand, while measures of investment and employment intentions are positive, he said.

Wheeler last month said the cash rate may rise by a total of 125 basis points this year.

Economists predict the cash rate will rise to 3.5 percent by the end of the year, according to the median forecast in a separate Bloomberg survey conducted last week. Wheeler will raise the rate at his next opportunity June 12 then pause in July, the survey showed.

Traders have pared bets on the pace of future rate increases as dairy prices decline, adding to signs that farmer payments from Fonterra Cooperative Group Ltd. (FCG), the world’s biggest dairy exporter, may drop.

Whole milk powder prices fell 1.6 percent at an auction on April 15 for a 20 percent decline over the past 10 weeks, according to prices posted on the GlobalDairyTrade website.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net Matthew Brockett, Michael Heath

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