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RBNZ raises rates for second month in a row

The New Zealand Reserve Bank has lifted the official cash rate (OCR) for the second time in as many months, saying non-tradable inflationary pressures are “becoming apparent” in an economy that’s picking up pace.

“Inflationary pressures are becoming apparent, especially in construction and other non-tradable sectors,” Reserve Bank governor Graeme Wheeler said on Thursday.

The bank lifted the OCR 25 basis points to 3.00 per cent, saying interest rates need to be at a level where they don’t add to demand so as to keep inflation expectations contained.

The speed and extent of further OCR hikes would depend on economic data and assessment of emerging inflationary pressures and New Zealand’s high dollar, he said.

After the OCR was lifted, the kiwi climbed to US86.06 cents from US85.80c. The trade-weighted index gained to 80.11 from 79.87.

Government figures last week showed inflation was 0.5 per cent in the first three months of the year, missing estimates of 0.7 per cent, with the headline number dragged down by a strong currency.

Non-tradable inflation rose at an annual pace of 3.00 per cent in the period, underpinned by rising housing-related costs.

The central bank is tasked with keeping inflation between 1.00 and 3.00 per cent, with a long-term midpoint of 2.00 per cent.

Mr Wheeler said the strong kiwi dollar was still a headwind to the tradable sector but the bank believes the current exchange rate is not sustainable.

In March, the central bank raised its forecast track for the 90-day bank bill rate, seen as a proxy for the OCR, by about 20 basis points from the June quarter this year, and sees the rate rising to 4.00 per cent by the end of 2014 and 5.3 per cent by March 2017.

The governor kicked off the tightening cycle last month when he raised the benchmark rate for the first time since 2010, citing building inflationary pressures as economic growth gathers momentum.

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