RPT-UPDATE 2 -NZ central bank raises rates, kiwi jumps as more tightening seen

Wed Apr 23, 2014 10:59pm EDT

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* RBNZ raises OCR by 25 bps to 3.0 pct as expected

* Signals more tightening coming in June

* Economist see another rate rise at next review -poll

By Naomi Tajitsu

WELLINGTON, April 24 (Reuters) - New Zealand's central bank raised interest rates for the second straight month on Thursday, and signaled it intends to keep tightening policy in the coming months to stay on top of inflation pressures in a booming economy.

The Reserve Bank of New Zealand lifted its official rate by 25 basis points to 3.0 percent in a widely expected move, but the hawkish tone of its statement sent the kiwi dollar up by a quarter of a U.S. cent as markets had positioned for a slightly less aggressive policy stance.

Indeed, despite a recent lower inflation print and weakness in dairy prices the central bank kept to its tightening path mapped out last month, when New Zealand took the lead among developed nations in raising rates in the current cycle.

A Reuters poll taken after the RBNZ's announcement showed 16 out of 17 economists expect the central bank will raise rates by another 25 basis points to 3.25 percent at its next policy meeting in June.

Thursday's move takes rates to a three-year high, and the RBNZ stuck to its guidance that more rate hikes lay ahead, while noting that a historically strong currency may affect the pace of its tightening cycle.

"It is important that inflation expectations remain contained. To achieve this it is necessary to raise interest rates towards a level at which they are no longer adding to demand," RBNZ Governor Graeme Wheeler said in a statement.

"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 pressures."

The RBNZ has said it expects to raise rates by roughly 200 basis points through late 2015 as post-earthquake reconstruction in the Canterbury region, a booming housing market, high terms of trade, and increasing migration drive the economy.

The New Zealand dollar rallied to a one-week high of $0.8638 after the announcement as investors took the statement to indicate that currency strength was not currently a deterrent to the RBNZ's tightening intentions. Interest rate futures <0#NBB:> slipped a touch.

Analysts said the RBNZ had stuck to its script that it would focus on getting the jump on future inflation, raising the likelihood of another rate rise at its next policy review.

"We expect the next move will be another rate increase in June and then it will probably time to pause and assess for a few meetings after that," ASB economist Chris Tennent-Brown said.

Markets are pricing an 84 percent chance of a rate rise in June, with 84 basis points of tightening in the next 12 months .

The RBNZ is forecasting the South Pacific nation's $185 billion economy to grow 3 percent this year, up from 2.3 percent in 2013.

CENTRAL BANK NOT FLINCHING

Economists in the Reuters poll expect rates to rise to a median 3.75 percent by year end, unchanged from before Thursday's announcement, and rising to 4.0 percent by mid-2015.

Ahead of Thursday's announcement, some in the market had raised concerns that the central bank may signal a subdued approach to raising rates given a sedate reading of consumer inflation last week and a stubbornly strong currency.

Figures showed annual inflation at 1.5 percent in the first quarter, softer than expected and below the RBNZ's target mid-point around 2 percent, bolstering the view that further rises will be gradual.

Meanwhile, the New Zealand dollar has rallied since the RBNZ began raising rates last month, lifting the currency to a life-time high against a currency basket and around 2.0 percent higher than the central bank's forecast.

Lower imported price pressures resulting from a continuously strong "kiwi" dollar may curb the need to take rates higher in the future.

The RBNZ also acknowledged an ongoing fall in global prices for dairy products, the country's largest export product, which could lower the country's terms of trade from a 40-year high.

While these factors may take some pressure off the need to tighten down the line, ANZ analysts said that they were unlikely to slow the RBNZ's hand in the near term.

"Markets had been somewhat soothed by a soft Q1 CPI, high NZD, and lower dairy prices, but while the RBNZ acknowledged all these, they are not flinching ... So it's business as usual," ANZ analysts said in a note. (Editing by Shri Navaratnam)

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