* OCR raised 25 bp to 3.25 pct, as expected
* Migration gains, construction, terms of trade fuel strong
* RBNZ says NZ dlr high and unsustainable
* NZ dlr rises above $0.86, interest rate futures dip
By Gyles Beckford
WELLINGTON, June 12 New Zealand's central bank
raised interest rates on Thursday and said the strength of the
currency and data would dictate the pace of future rises as it
pointed to a steady but moderate tightening of policy.
The Reserve Bank of New Zealand lifted its official rate by
25 basis points to 3.25 percent as expected, the third
consecutive rise in as many meetings. It said rates would need
to go higher as strong economic growth fuels inflation
pressures, making it the only central bank among developed
economies to be raising rates in the current cycle.
"The speed and extent to which the OCR (official cash rate)
will need to rise will depend on the future economic and
financial data, and its implications for inflationary
pressures," RBNZ Governor Graeme Wheeler said in a statement.
The statement was largely similar to that issued in March
and April, reiterating that inflation pressures are building,
particularly in the construction sector, and that terms of trade
and migration gains were underpinning growth, although the high
exchange rate was offsetting.
"In this environment, it is important that inflation
expectations remain contained and that interest rates return to
a more neutral level."
The RBNZ's forecasts of wholesale interest rates were little
changed from the March statement, and implied two further 25
basis point rate increases this year, and a steady pace through
The bank has previously said it expects to raise rates by
about 200 basis points through to late 2015 as post-earthquake
reconstruction in the Canterbury region, a booming housing
market, high terms of trade, and increasing migration drive the
The RBNZ said it estimated that the economy has grown by
about 4 percent in the year to June, although it trimmed its
forecast slightly for future years. It also reduced inflation
forecasts a shade.
The New Zealand dollar rose around half a cent to a
high around $0.8635 after the announcement, while interest rate
futures <0#NBB:> edged lower.
The bank repeated its familiar comment that the New Zealand
dollar remained unsustainably high despite the sharp fall in
commodity prices in New Zealand dollar. The kiwi has come off
its highs in the past month, but the trade weighted currency
basket, which is the RBNZ's preferred currency measure,
has remained above the bank's forecast.
The RBNZ said it was factoring in further softness in
commodity prices and a lower exchange rate.
Analysts said the RBNZ seemed intent on not giving the
impression it is easing up on tackling inflation.
"They still want to get rate to a more neutral levels and
that's a clear reaffirmation of their tightening bias," said
Michael Turner, a strategist at RBC Capital Markets. "The odds
are leaning to one more hike in July and maybe a pause after
Turner said it remained an open question as to what neutral
interest rates might be. "There's a suggestion it might be
around 5 percent, but that seems very high in this low-rates
Markets are pricing 96 basis points of hikes in the next 12
months, but a sedate reading of consumer inflation and a
stubbornly strong currency have raised speculation the RBNZ may
slowdown its planned rate rises.
Annual inflation slowed fractionally to 1.5 percent in the
first quarter, and subsequent readings on wages, jobs, and
consumer and business sentiment have all been modest, backing
the view the RBNZ can afford to be gradual in future rate rises.
The RBNZ said major world economies looked to be recovering
albeit at a modest pace, and it expected global inflation
pressures and stimulatory policies to stay in place for some
(Editing by Lincoln Feast)