New Zealand hikes cash rate
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New Zealand exporters have been hit hard by currency rise and now face interest rate hike.
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(CNN) -- New Zealand's Reserve Bank increased its official cash rate by 0.25 percentage points to 5.25 percent Thursday morning, citing a need to "ensure inflation remains comfortably within the target range over the medium term".
The New Zealand Stock Exchange Top 50 index quickly fell 1.46 percent to be at 2483.1 points in midday trading.
Reserve Bank Governor Dr Alan Bollard said in a statement: "The New Zealand economy has experienced a period of impressive growth over the past two years.
"Productive capacity and the labor market are becoming relatively tight. Reflecting this, inflation pressures in some parts of the domestic economy have started to become more apparent.
"Although falling import prices, due to the rising exchange rate, have so far kept CPI (consumer price index) inflation low, those reductions are unlikely to be sustained.
"If domestic inflation is left unchecked, CPI may start to rise to uncomfortable levels."
This may be the first of three quick increases in New Zealand's cash rate, according to HSBC's chief economist for Australia and New Zealand, John Edwards.
He says in his analysis: "We have little doubt there are another two 25bp (basis points) moves to come."
Mr Edwards said he expected the initial increase in March. However, the release Thursday of strong December trade figures "shows a growth trend in both export and imports, underlining the circumstances to which Dr Bollard is responding".
"Dr Bollard could have cash at 5.75 percent (by) mid-year," Mr Edwards said.
"(This is) a level we think will then match Australia's cash and one at which the central banks of both Australia and New Zealand will be content to leave for some considerable period."
Referring to the new trade figures, Dr Bollard said: "Data since December has pointed to stronger activity than we then thought in areas such as household spending, construction and the housing market, further fuelling inflation.
"Further inflation pressure is likely in the next few months from areas such as construction costs and energy. Interest rates have been stimulating demand as shown in further solid growth in household credit.
"By raising interest rates now, we hope to avoid having to increase interest rates more aggressively later on."
Dr Bollard indicated he is mindful of the plight of New Zealand exporters because of their local currency's gains against the U.S. dollar in particular.
"We are aware this has placed pressure on the export sector," he said. "However, as yet this has not had much effect on spending in the local economy."
