New Zealand lifts cash rate to 5 percent


New Zealand's Reserve Bank says the economy is already operating at "close to full capacity"

CNN's Geoff Hiscock
Asia business editor

WELLINGTON, New Zealand (CNN) -- New Zealand's Reserve Bank surprised markets Wednesday by lifting its official cash rate from 4.75 per cent to 5 per cent.

The move came as the U.S. Federal Reserve left rates unchanged and moved to a neutral outlook for the U.S. economy for the first time in three years.

Wednesday's decision by the Reserve Bank makes New Zealand the first country in the region to lift rates since the September 11 terror attacks.

Australia is expected to follow suit in the next few months, with most economists tipping a rise from the current cash rate of 4.25 percent to 5.0 or 5.25 percent by year's end.

New Zealand last acted on November 14, when it cut rates by half a percentage point to 4.75 percent.

Reserve Bank Governor Don Brash foreshadowed further rate rises in the months ahead, saying monetary conditions were "still stimulatory" and there would likely be a need to further reduce this stimulus.

HSBC Australia senior economist Anthony Thompson said after the announcement that HSBC was forecasting another quarter of a percentage point rise on April 17 and a similar rise on May 15.

Rate tipped to reach 6.25% by year-end

He said HSBC saw New Zealand's official cash rate being at 6.25 percent by the end of the year.

Most analysts had expected New Zealand's central bank not to act until next month, although IFR Asia Pacific chief economist George Worthington noted in an outlook Monday that Brash was "always more eager to tighten than to loosen".

In his statement Wednesday, Brash noted that New Zealand's official cash rate had been cut by one percentage in the last few months of 2001 because of concerns about the deflationary risk arising from a weak world economy.

But now, he said, the risk to the global economy looked "less threatening", with activity picking up more quickly in the U.S., and the Australian economy looking robust.

Brash said New Zealand's economy had been stronger than expected.

"Indeed, the economy is already operating at close to full capacity, and indications are that pressures will grow further in the absence of some increase in interest rates.

"Both consumer and business confidence have bounced back to pre-11 September levels," he said.

Still not strong

But Brash warned that the global economy was still not particularly strong.

"It seems likely that on average our trading partners will grow only moderately this year, and significant risks remain. The Japanese economy continues to have major difficulties, the US recovery could stumble over the high level of debt already accumulated, and global equity markets remain vulnerable to further weakness."

Brash also noted that even after Wednesday's increase, monetary conditions remained stimulatory.

"At the moment it seems likely that there will need to be some further reduction in monetary stimulus over the months ahead," he said.