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New Zealand central bank hikes rates, signals more tightening

New Zealand's central bank raised interest rates on Thursday and signaled that it would keep tightening monetary policy in the coming months as the central bank tames inflation pressures which have been brewing as the country's economy strengthens.

The Reserve Bank of New Zealand lifted its official rate by 25 basis points to 3.0 percent in a widely expected move, continuing its tightening path mapped out last month, when the central bank took the lead among developed nations in raising rates in the current cycle.

"It is important that inflation expectations remain contained. To achieve this it is necessary to raise interest rates towards a level at which they are no longer adding to demand," RBNZ Governor Graeme Wheeler said in a statement.

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"The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures, including the extent to which the high exchange rate leads to lower inflationary pressures."

Thursday's move takes rates to a three-year high, and the RBNZ stuck to its guidance that more rate hikes lay ahead, while adding that it would assess the extent to which a historically strong New Zealand dollar lowers inflationary pressures.

People enter the Reserve Bank of New Zealand (RBNZ) headquarters in Wellington, New Zealand.
Mark Coote | Bloomberg | Getty Images
People enter the Reserve Bank of New Zealand (RBNZ) headquarters in Wellington, New Zealand.

The RBNZ has said it expects to raise rates by roughly 200 basis points through late 2015 as post-earthquake reconstruction in the Canterbury region, a booming housing market, high terms of trade, and increasing migration to drive the economy.

The RBNZ said it estimated that the economy grew by 3.5 percent in the year to March. It has forecast growth of 3.0 percent for 2014, up from 2.3 percent in 2013.

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The New Zealand dollar gained around a third of a cent to a high of $0.8621 after the announcement, but interest rate futures were barely moved.

Analysts said there were no surprises from the RBNZ, which looks to have its focus on getting the jump on future inflation.

"We are forecasting further hikes of 25 basis points each in June, July, and December this year - although we admit that the July hike is a very close call," said Westpac economists in a note.

Markets are pricing 109 basis points of hikes in the next 12 months, but a sedate reading of consumer inflation and a stubbornly strong currency have raised speculation that the RBNZ may take a steady approach to rate rises.

Data last week showed annual inflation at 1.5 percent in the first quarter, softer than expected and below the RBNZ's target mid-point around 2 percent, bolstering the view that further rises will be gradual.

Meanwhile, the New Zealand dollar has rallied since the RBNZ began raising rates last month, lifting the currency to a life-time high against a currency basket and around 2.0 percent higher than the central bank's forecast.

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Lower imported price pressures resulting from a continuously strong "kiwi" dollar may curb the need to take rates to 3.75 percent by year-end, the median rate in the Reuters poll taken ahead of Thursday's policy decision.

New Zealand is also facing an ongoing fall in global prices for dairy products, the country's largest export product, which could lower the country's terms of trade from a 40-year high hit late last year and also take some heat off the RBNZ to tighten down the line.

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