The Reserve Bank has increased the Official Cash Rate (OCR) from 2.50 to 2.75 percent to keep inflationary pressures in check.

Reserve Bank Governor Alan Bollard argued the increase in interest rates was a sign and consequence of a strengthening economy. Prices for New Zealand’s exports have risen sharply over the past few months and Dr Bollard expects the job market to improve in the year ahead.

“In New Zealand, growth of around 3.5 percent is expected this year and next,” he said.

“The main drivers of this outlook are higher export prices and volume growth, an improving labour market and a pick-up in residential and business investment. However, we expect households to remain relatively cautious, with the housing market and credit growth staying subdued.

“Underlying CPI inflation is expected to track within the target range even as the economy expands further. That said, headline CPI inflation will be boosted temporarily by the announced increase in GST and other government-related price changes. Provided households and firms do not reflect this price spike in their wage and price-setting behaviours we do not expect a lasting impact on inflation.

“Given this outlook and as previously signalled, we have decided to begin removing some of the monetary policy stimulus that is currently in place. The further removal of stimulus will be reviewed in light of economic and financial market developments.”

Dr Bollard does not expect today’s interest rate to be the first of a series of rises to rival those seen in the last decade. (See Interest Rate Graph.)

“The fact that bank funding costs are higher, long-term interest rates are higher than short-term interest rates, and a greater proportion of borrowers use floating rate mortgages should all reduce the extent to which the OCR will need to be increased relative to previous cycles.”

New Zealand Interest Rates 1999 – 2010