The New Zealand bubble

Reserve Bank raises Official Cash Rate

Radio NZ,

24 April, 2014

The Reserve Bank has raised its benchmark interest rate to 3 percent in a widely expected move that is likely to push up mortgage rates.

The rise in the Official Cash Rate (OCR) was the second increase in six weeks.

Governor Graeme Wheeler said in a statement on Thursday the economy had considerable momentum, led by strong growth in the construction sector and high dairy prices. Net immigration continued to rise, boosting housing and consumer demand.

Mr Wheeler said inflationary pressures were increasing and were expected to continue doing so over the next two years.

The Reserve Bank upgraded its estimate of GDP growth for the year to March to 3.5 percent. The central bank is seeking to keep inflation near the middle of its 1-3 percent target band, which it said will ensure the economic expansion can be sustained.

"The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures, including the extent to which the high exchange rate leads to lower inflationary pressure," Mr Wheeler's statement said.

But the statement added that the bank did not believe the current level of the currency was sustainable.

The OCR increase is likely to be reflected in higher borrowing costs for households and some analysts say mortgage rates could rise to 8 percent in the next couple of years.

The central bank last increased the Official Cash Rate on 13 March, pushing it from a three-year long record low of 2.5 percent to 2.75 percent.

In March, the central bank forecast a benchmark interest rate of 3.75 percent by the end of this year and 4.75 percent by 2015.

First NZ Capital economist Chris Green told Radio New Zealand's Nine to Noon programme the market is expecting the next rise in June.