New Zealand lifts interest rates again


Population growth through migration is fuelling strong demand in New Zealand

By Geoff Hiscock
CNN Asia Business Editor

WELLINGTON, New Zealand (CNN) -- New Zealand's central bank has lifted interest rates for the third time in two months, raising the official cash rate from 5.25 percent to 5.5 percent.

The move was widely expected and had been flagged in previous comments by the Reserve Bank of New Zealand.

The bank's acting governor Rod Carr cited inflation concerns and cost pressures flowing from strong consumer demand for Wednesday's move.

He said further rate rises would probably be needed in the months ahead.

"The economy's ability to meet increasing demand without pressure on costs, margins and therefore prices appears limited," Carr said Wednesday.

Price pressures

"Core inflation is still at the upper end of the zero to 3 percent target band, leaving little headroom for price pressures to accelerate from here on."

New Zealand was the first country in the Asia Pacific region to tighten interest rates after the September 11 terror attacks in the United States.

It lifted interest rates by a quarter of a percentage point on March 20, and again by a similar amount on April 17.

HSBC Australia said Wednesday it expected New Zealand's official cash rate to peak at 6.25 percent by the end of the year.

Carr said a "sharp turnaround" in net migration was boosting New Zealand's population.

This in turn was contributing to strong household spending, residential construction and housing market activity.

Carr said a recovery in global demand -- although fragile in some respects -- was now underway.

More on the way

"Today's decision is a further step in the process of reducing the interest rate stimulus that we put in place last year, when the outlook for the economy looked decidedly weaker," he said.

"At this point, it appears likely that further increases in interest rates will be required over the year ahead, possibly to a greater extent than we projected in March."

The stock market is up sharply Wednesday afternoon, with the NZSE Top 40 index 23 points or 1.14 percent higher at 2087.27. The New Zealand dollar is also firmer against the greenback, up about 0.4 percent to 45.53 U.S. cents.

New Zealand's neighbor across the Tasman Sea, Australia, lifted rates a quarter of a percentage point to 4.5 percent last week. It was the first increase there in almost two years.