New Zealand's central bank raised its policy rate for the fourth time in a row but signaled that it would keep rates on hold for a while, saying it was "prudent that there now be a period of assessment before interest rates adjust further towards a more-neutral level."
The Reserve Bank of New Zealand (RBNZ) raised its Official Cash Rate (OCR) by another 25 basis points to 3.50 percent, as widely expected, and has now raised it by a total of 100 basis points since March when it became the first central bank among the advanced economies to raise its rate since July 2011 to curb inflationary pressures.
The RBNZ has often said the strong exchange rate of the New Zealand dollar, known as the kiwi, was not sustainable and today ratcheted up its language and warned it would decline in response to a fall in export prices for dairy and timber in recent months.
"With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall," the RBNZ's governor, Graeme Wheeler, said in a statement.
The kiwi rose rapidly during the global financial crises as investors sought safe haven, rising from almost 2 to the U.S. dollar to 1.14 by July 2011. Since then it has been volatile and eased in the middle of 2013 and then gained strength as it became clear the central bank was starting to get ready to raise interest rates.
In response to the central bank's decision to put rates on hold for a while, the kiwi fell to 1.16 to the dollar from around 1.15 yesterday, still well above 1.22 at the start of the year.
Although inflation remains below the RBNZ's 2.0 percent target, the central bank repeated that it was important that inflation expectations remain contained and today's rate rise would help keep future inflation near the target and ensure a sustained economic expansion.
"The speed and extend to which the OCR will need to rise will depend on the assessment of the impact of the tightening in monetary policy to date, and the implications of future economic and financial data for inflationary pressures," Wheeler said.
New Zealand's headline inflation rate rose to 1.6 percent in the second quarter of the year from 1.5 percent in the first quarter but Wheeler said strong growth in output has been absorbing spare capacity in the economy and this was expected to add to inflation although wage inflation remains subdued.
Last month the RBNZ projected second quarter inflation of 1.7 percent and cut its forecast for average inflation this year to 1.5 percent from it March forecast of 1.7 percent, up from 0.9 percent in 2013. For 2015 and 2016 the RBNZ forecasts 1.8 percent inflation and 2.1 percent in 2017.
One of the drivers of inflation has been strong rises in home prices and while strong immigration is adding to housing and household demand, the central bank said house price inflation had moderated further since its June forecast.
New Zealand's economy has been expanding briskly and is forecast to grow by 3.7 percent this year, Wheeler said, adding that growth among its trading partners had eased slightly in the first half of the year but this appeared to be temporary.
In the first quarter of the year, New Zealand's Gross Domestic Product expanded by 1.0 percent from the fourth quarter for annual growth of 3.8 percent, up from a 3.3 percent rate in the fourth quarter of 2013.