N.Z. Raises Rates for Second Month as Growth Quickens: Economy

New Zealand’s central bank raised interest rates for the second time in two months as an economic recovery gathers pace, spurring gains in the local dollar.

“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 Reserve Bank of New Zealand will assess the extent to which currency gains curb inflation pressures, he said.

The central bank, the first in a developed nation to start raising rates this year, boosted 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. Since Wheeler said last month the cash rate may rise a total of 125 basis points this year, data has shown inflation unexpectedly slowing in the first quarter as the kiwi’s strength curbed import costs.

“There is a clear inference that the currency will influence the bank’s future rate decisions,” said Stephen Toplis, head of research at Bank of New Zealand Ltd. in Wellington, who still expects further rate increases in June and July. “The longer the currency stays higher, the greater the chance that there is a pause in the tightening process.”

Currency Gains

New Zealand’s dollar climbed as high as 86.37 U.S. cents from 85.87 cents immediately before the statement. It bought 86.32 U.S. cents at 2:10 p.m. in Wellington.

The timing and scope of future rate 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,” Wheeler said, adding that the currency “remains a headwind” for exporters.

The RBNZ earlier assumed the kiwi dollar’s trade weighted index would average 78.4 in the three months through June; it was as high as 80.3 today.

“The bank does not believe the current level of the exchange rate is sustainable,” Wheeler 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.

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.

Inflation Pressure

“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.”

The RBNZ raised the key rate from 2.5 percent on March 13, bringing an end to three years of record-low borrowing costs.

It 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. Last month, it forecast growth would accelerate to 3.9 percent in the year ending June.

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.

Economists predict the cash rate will be increased 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., 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.

Before it's here, it's on the Bloomberg Terminal.