Reserve Bank lifts cash rate

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RATE RISE: The Reserve Bank today raised the official cash rate to 3 percent.

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The Reserve Bank today raised interest rates to 3 percent, as expected, but also indicated it is likely to take a pause in its rate hike cycle.

Reserve Bank Governor Alan Bollard signalled that interest rates were likely to increase more slowly than the bank predicted six weeks ago, as he announced a 0.25 per cent increase in the Official Cash Rate (OCR) to 3 per cent this morning.

It is the second time in six weeks that the OCR, which influences mortgage rates, has been raised. Economists widely expected the move.

The OCR was slashed to a record low of 2.5 per cent last year in a bid to stimulate the economy, but Dr Bollard said in June that it would be raised towards its historic average, which is above 5 per cent, as the economy recovers.

Today the governor softened his stance, arguing that while a rate hike was appropriate now, further increases in the OCR were expected to be more gradual than predicted in June because of a weak economic recovery both in New Zealand and around the world.

Bollard's decision "all makes sense" in the light of the weakening outlook for the domestic economy, said Bank of New Zealand head of research Stephen Toplis.

While the RBNZ was now looking to a lower interest rate path over the next two years or so, there was still a "50/50" chance another rate rise would be announced following the next RBNZ board meeting in six weeks' time, because of the "extraordinary level of support" that monetary conditions had been affording the economy, Toplis said.

The New Zealand dollar tumbled after Reserve Bank statement.

The immediate sell-off following the announcement reflected market expectations that the RBNZ would push the OCR as high as the expected 6 percent by around September 2012 were now "somewhat diminished," said  Toplis.

ASB chief economist Nick Tuffley said in a commentary that if the Reserve Bank did pause in its rate hike cycle, then "the 3.5 percent mark" would be a likely point. He said another 25 basis point hike was likely in September, and that even if the Reserve Bank did slow down its pace, he still expected rates to hit a peak of 5 percent.

Exporters unhappy

Meanwhile, exporters said today’s rate hike was likely to stifle export growth.

"Reserve Bank Governor Dr Alan Bollard noted that domestic demand, retail spending, housing turnover and business investment are all weak; this begs the question: why has he raised the rate again?” said New Zealand Manufacturers and Exporters Association (NZMEA) chief executive John Walley.

Mr Walley said New Zealand could not afford a central bank policy that ignored growth today in order to focus on possible inflation down the track.

- © Fairfax NZ News