New Zealand hiked interest rates for the second time in less than two months Thursday, raising them 25 basis points to 7.75 percent as it wrestles to keep inflation under control.
The latest rise in the official cash rate is aimed at ensuring "inflation outcomes remain consistent with achieving the target of 1.0-3.0 percent inflation on average over the medium-term," the central bank said in a statement.
But, economists gave the announcement a lukewarm reaction. Westpac Bank chief economist Brendan O'Donovan said there was nothing in the statement that would materially change market pricing on longer term interest rates.
The latest rise followed a similar 25 basis points increase in early March and gives New Zealand one of the highest interest rate levels in the developed world.
The move was expected to put further upward pressure on the dollar and consequently on exporters' margins. "Recent indicators confirm that the resurgence in economic activity that began in late 2006 has continued over recent months, with domestic demand continuing to expand strongly," the Reserve Bank of New Zealand said.
"Demand is being fuelled by a buoyant housing market, increases in government expenditure, rising terms of trade, ongoing net immigration and a robust labour market."
While interest rates are being used to try to slow domestic demand, particularly in the housing market, they are also helping push up the New Zealand dollar, making life ever harder for exporters. Latest inflation figures showed the Consumer Price Index rose just 2.5 percent in the year through March but there was a 4.1 percent rise in the domestic sector where the impact of overseas competition is not felt.
Real estate industry data showed median house prices were up around 14 percent in March from a year earlier. Some economists had felt the central bank could afford to leave rates alone following rises in home lending rates that had effectively delivered a tightening of monetary policy, along with the sharp rise in the local dollar. The central bank statement described the New Zealand dollar exchange rates as "exceptional by historical standards" and "unjustified on the basis of medium-term fundamentals", which economists saw as a hint at intervention.
Westpac's O'Donovan called it "a strong warning to currency markets" but added "in our opinion intervention is not imminent". Last week, the dollar nudged 75 US cents and sat at 74.25 US cents immediately after the rate announcement Thursday before rising to 74.81 US cents.
Export New Zealand chief executive Bob Walters said only dairy and log exporters were enjoying high commodity prices, and the high currency was causing huge damage to others.
Auckland Chamber of Commerce chief executive Michael Barnett believed the high dollars would see cheaper imports fuelling spending "and the high interest rates will continue to make NZ attractive for non productive areas of the economy.
"The biggest losers are entrepreneurial exporters who will lose on two counts higher; interest rates on the money required for business development and the high interest rate reducing returns."
The central bank in acknowledging parts of the export sector faced challenging conditions, said a recent sharp increase in world dairy prices was expected to provide a boost to incomes in that sector and tourist arrivals were continuing to grow. The rise in the trade-weighted exchange rate was expected to exert some downward pressure on medium-term inflation, it added.
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