WELLINGTON: 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 lifted the official cash rate (OCR) 0.25 points to 2.75 percent and said it planned more hikes in an economy that was growing with "considerable momentum".
The bank's governor Graeme Wheeler said rates no longer needed to be kept at a record low and could return to "normal" levels, sending 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 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 and Wheeler said the bank was determined to keep the cost of living within the bank's 1.0-3.0 percent target band.
"The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures," he said.
Capital Economics analyst Gareth Leather said no advanced economy had lifted interest rates since 2012.
He expected the OCR to rise to 3.25 percent by the end of the year, with some analysts tipped it will peak at 5.5 percent by late 2016.
- 'Rock star economy' -
The last time New Zealand lifted the OCR was in July 2010, when so-called "green shoots" of economic recovery were emerging, only to be overwhelmed by fresh problems such as Europe's debt crisis.
in response, central banks in developed countries dropped interest rates to ultra-low levels in a bid to stimulate growth.
While Wheeler noted some signs of recovery in New Zealand's global trading partners, Westpac New Zealand chief economist Dominick Stephens said other advanced economies would not rush to follow New Zealand's lead.
He said the earthquake rebuild and New Zealand'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.
HSBC's chief economist for Australasia Paul Bloxham this year dubbed 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.
Gross domestic product expanded 2.6 percent in the 12 months to December and analysts expect growth of up to 4.0 percent this year, outstripping most of the developed world.
The benchmark NZX-50 reached record highs last week on the back of a strong earnings season, while consumer and business confidence are both on the rise.
The stock index 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.
Prime Minister John Key, facing a general election in September, has vowed to campaign on his economic record.
A string of interest rate rises in the mortgage belt may prove a political headache for the conservative leader, but he put a positive gloss on the situation by suggesting Wheeler was giving a vote of confidence to the economy.
"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," Key said this week.
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