WELLINGTON Jan 30 New Zealand's central bank on Thursday gave its strongest indication yet that it will raise interest rates in March, probably making it the first developed country to raise interest rates in the current cycle.
The Reserve Bank of New Zealand held its official cash rate at a record low 2.5 percent, as widely expected, warning that rate rises were just around the corner.
"While headline inflation has been moderate, inflationary pressures are expected to increase over the next two years," Reserve Bank of New Zealand Governor Graeme Wheeler said in a statement.
"In this environment, there is a need to return interest rates to more normal levels. The Bank expects to start this adjustment soon."
He said the strong New Zealand dollar, hovering near a high versus a currency basket, was dampening inflation, but current levels were unsustainable in the long run.
The New Zealand dollar fell almost a cent to a low of $0.8175, before recovering slightly to $0.8200. Interest rate futures <0#NBB:> rose as much as 9 points.
The RBNZ's decision followed strong data in the past quarter that showed the $170 billion economy growing faster than the central bank had forecast, while inflation was heading closer to the RBNZ's 2 percent target.
"The RBNZ have given a clear hint that it's all but certain that it's going to raise rates in March," said ASB Bank chief economist Nick Tuffley.
A Reuters poll before the decision had 12 of 17 economists picking March as the start of the tightening cycle.
That would place the RBNZ well ahead of other major central banks, many of which continue to offer monetary stimulus to boost their economies.
The U.S. Federal Reserve has begun tapering its massive bond-buying programme, but it is some way off from raising interest rates, while the Bank of Japan has another round of quantitative easing. The Reserve Bank of Australia is expected to keep rates low for much of this year.
Wheeler said the exports were benefiting from a growing global economy, but uncertainties around the timing and impact of monetary stimulus withdrawal in major economies was affecting sentiment, particularly in emerging economies.
GROWING ECONOMIC MOMENTUM
Domestic sentiment surveys this month have shown that New Zealand businesses and consumers are optimistic that the economy will grow strongly, putting it on track to be one of the top-performing developed economies of 2014.
The RBNZ said it expected annual growth in 2014 to continue around the 3.5 percent seen in the year to September, driven by high commodity prices, earthquake reconstruction and a strong housing market.
With the economy growing and inflation at 1.6 percent - a near two-year high and approaching the mid-point of the RBNZ's 1 percent-3 percent target - the central bank is preparing to get ahead of the curve to prevent consumer prices from rising to uncomfortably high levels.
A pioneer of inflation targeting, the RBNZ has said the speed and extent of rate rises will depend on the impact that higher house prices and construction costs have on broader inflation pressures. (Reporting by Naomi Tajitsu; Editing by Robin Pomeroy)