(Removes extraneous word from headline)
* OCR raised 25 bp to 3.50 pct, as expected
* RBNZ: Appropriate to pause and assess impact of tightening, more rises
* RBNZ: NZ dlr high and unsustainable, could have big fall
* NZ dollar falls, interest rate futures rally
By Gyles Beckford
WELLINGTON, July 24 New Zealand's central bank lifted its
official cash rate by 25 basis points to 3.50 percent as expected on Thursday,
but then suspended its rapid-fire run of interest rate rises to study their
impact on the economy.
It was the Reserve Bank of New Zealand's fourth consecutive rise in as many
policy meetings, taking the rate from 2.5 percent in March to July's 3.5
"It is prudent there now be a period of assessment before interest rates
adjust further to a more-neutral level," RBNZ Governor Graeme Wheeler said in a
He said rates would still need to rise in the future, but the economy was
feeling the impact of its previous tightening, with commodity prices falling,
and inflation moderate.
Consumer price inflation ran at an annual rate of 1.6 percent in the second
quarter, Statistics New Zealand said last week, below the 1.8 percent annual
pace forecast in a Reuters survey.
The move to the sidelines was widely expected given the recent fall in some
key commodity prices, tame inflation, and strong New Zealand dollar.
The bank's forecasts in June implied the cash rate reaching 3.75 percent by
the end of the year, two additional 25 basis point rate increases this year, and
a steady pace through 2015.
A Reuters poll after the statement reaffirmed the consensus view that the
RBNZ will pause until December before resuming rate rises, with a total of 100
basis points of tightening seen over the next year.
"Our view remains unchanged, we think the Reserve Bank is on hold until
December, and they will start raising rates again then, but at a far more
gradual pace," said ASB Bank chief economist Nick Tuffley.
Financial markets also scaled back their expectations of rate rises in the
next 12 months to 31 basis points from 68 basis points before the statement.
KIWI DOLLAR BATTERED
While the RBNZ's economic comments largely met expectations, it surprised
with its aggressive comments about the exchange rate.
"With the exchange rate yet to adjust to weakening commodity prices, the
level of the New Zealand dollar is unjustified and unsustainable and there is
potential for a significant fall," Wheeler said.
The New Zealand dollar plunged a full cent to a six-week low of
$0.8593 before paring its losses slightly to settle around $0.8600.
Interest rate futures <0#NBB:> rallied, pushing their implied yields lower.
"We interpret this as a direct warning that the RBNZ may intervene in
foreign exchange markets by selling New Zealand dollars," said Westpac chief
economist Dominick Stephens.
The RBNZ had warned in May it might sell the currency if conditions were
Its latest statement said the economy was expected to grow 3.7 percent this
year, but a sharp fall in some commodity prices would feed through to primary
The RBNZ said inflation was moderate, house price growth has slowed and
wages were subdued, but spare capacity was being used up, driven by the
earthquake reconstruction in Canterbury and strong migration gains.
Separately data showed the economy notching another solid trade surplus in
June, with the annual surplus within sight of last month's near 20-year high.
(Reporting by Gyles Beckford; Editing by Dan Grebler and Eric Meijer)