New Zealand's central bank raised interest rates by a quarter of a point to 8.25% on Thursday, as expected, but said it did not expect to raise them further as it saw signs of an easing in domestic borrowing.
The Reserve Bank of New Zealand lifted its official cash rate for the fourth straight time on concerns over persistent inflation that has been fuelled by a tight labor market and rising oil and food prices.
The country's interest rates are the highest in the industrialized world and in line with those in Indonesia, though the central bank said it did not see them rising further.
"New Zealanders have been showing early signs of moderating their borrowing," said Governor Alan Bollard. "Provided they keep up, and the pressures on resources continue to ease, we
think the four successive increases we have delivered will be sufficient to contain inflation."
Bollard told Reuters in an interview in June that there would be no easing in monetary policy until it sees a clear slowdown in consumer demand and house price inflation.
"The key message is that they have said they don't expect further tightening," said UBS senior economist Robin Clements. "But easing is going to be a considerable time away unless the economy softens very rapidly."
The New Zealand dollar fell to a low of 79.97 U.S. cents after the announcement from 80.33/43 cents but recovered slightly to settle at around 80.00/10. The yield on the benchmark 90 day bank bill rose three basis points to 8.52%.
Twelve of 17 forecasters in the latest Reuters poll had predicted a quarter percentage point rate increase, with a median risk for such a move put at 60%.
Consumer spending has remained strong, with retail sales rising a seasonally adjusted 1.2% in May, while consumer prices rose 1% during the June quarter, topping both market and central bank forecasts.
Official and industry data earlier this month showed the annual pace of house value growth was around 12% from a year earlier.
Bollard reiterated that the currency was hurting the export sector but warned that current high levels were unsustainble. "The high New Zealand dollar is not sustainable medium term and investors should understand this," Bollard said in a statement.
Investors have been pouring funds into the New Zealand dollar in carry trades, where they borrow in low yielding currencies to invest in high yielding ones.
The central bank has been intervening to moderate the pace of the New Zealand dollar's rise. It stepped into the market on June 11 for the first time since the currency was allowed to trade freely in 1985.
However, the currency has risen more than 6% since the Reserve Bank's previous review on June 7 when it unexpectedly raised rates to 8%. The RBNZ also raised interest rates by 25 basis points in March and April.