* 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
(Adds poll and new comments)
By Gyles Beckford
WELLINGTON, June 12 New Zealand's central bank
raised interest rates to a five-year high on Thursday and cooled
expectations it may slow the pace of future policy tightening,
sending the currency sharply higher.
As expected, the Reserve Bank of New Zealand lifted its
official rate by 25 basis points to 3.25 percent - the highest
level since January 2009 and the third consecutive rise in as
The central bank 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.
"In this environment, it is important that inflation
expectations remain contained and that interest rates return to
a more neutral level," RBNZ Governor Graeme Wheeler said in a
The hawkish tone of the statement and the governor's
determination to rein in growing price pressures wrong-footed
markets which had expected the bank to signal a slightly slower
pace of tightening.
The New Zealand dollar, its yield appeal burnished
by the RBNZ's tough talk, soared half a cent to settle around
$0.8635, while interest rate futures <0#NBB:> edged lower.
"It (statement) was a lot more hawkish than the market was
expecting. The market had underpriced the 90-day track further
out and the RBNZ has maintained the same path, so that's the
reason why the kiwi is stronger," said Tim Kelleher, head of
institutional FX sales at ASB.
The central bank's statement and forecasts were little
changed from those 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
Annual inflation slowed fractionally to 1.5 percent in the
first quarter, and the RBNZ wants to anchor it around 2 percent,
the mid-point of its 1-3 percent target band.
The central bank gave few signs it is preparing to ease up
in its battle to control inflation.
"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," Wheeler said.
Some in the markets had expected a slight softening in the
tightening bias in the wake of a strong currency, falling
commodity prices and signs of a slowdown in housing inflation.
A Reuters poll after the decision has a clear expectation of
a further 25-basis-point rise in July and one more this year,
most likely in December.
Market pricing after the statement implied a 52 percent
chance of a rate rise in July and 80 basis points of hikes in
the next 12 months, compared to 96 basis points before
"This tightening cycle has a long way to run before it's all
over and done with," said Bank of New Zealand head of market
research Stephen Toplis.
The RBNZ's forecasts of wholesale interest rates implied two
further 25 basis point rate increases this year, and a steady
pace through 2015, largely unchanged from its March projections.
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 the economy has grown about 4
percent in the year to June, although it trimmed its forecast
slightly for future years. It also reduced inflation forecasts a
The bank repeated its familiar comment that the New Zealand
dollar remained unsustainably high despite the sharp fall in
commodity prices, but the Governor shied away from saying
conditions were appropriate for it to sell the currency.
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 rates to a more neutral levels and
that's a clear reaffirmation of their tightening bias," said
Michael Turner, a strategist at RBC Capital Markets.
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
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 & Shri Navaratnam)