Reserve Bank lifts interest rate

The Reserve Bank has lifted interest rates to 3 per cent and says they will keep rising "as needed", with mortgage rates set to rise too.

But it may be the central bank hits the pause button after raising rates once or twice more this year.

ASB Bank economists said the cash rate was expected to rise again in June, but after that there could be an "extended pause".

A June increase to 3.25 per cent in the cash rate was more "event-dependent" than the last two increases had been, ASB said.

The Reserve Bank had noted the economic risks of weaker dairy prices and the high dollar, but did not appear "overly concerned about their impact at this stage", ASB chief economist Nick Tuffley said.

ANZ still expects another 50 basis points of OCR rises before the end of the year, with the next hike to come in June.

"July cannot be ruled out if pricing intentions and inflation expectations start to move." ANZ said.

However, Westpac Bank said it still expected rates to rise again in June, July and December.

"Though we admit that the July hike is a very close call," Westpac chief economist Dominick Stephens said.

The June statement from the Reserve Bank was likely to give a steer on whether there would be another move in July.

Announcing the latest rate rise this morning, the central bank said there had been "some moderation" in the housing market.

Speed limits on low-deposit home loans introduced late last year had eased pressure, it said.

"And rising interest rates will have a further moderating influence," governor Graeme Wheeler said.

However, an increase in net migration was adding to housing demand.

The Reserve Bank also warned that the high New Zealand dollar was not "sustainable".

As widely expected the bank moved the official cash rate up from 2.75 per cent to 3 per cent this morning.

In a one-page statement, the bank said that to keep inflation in check, rates would need to rise "towards a level at which they are no longer adding to demand".

That means interest rates would neither push the economy ahead nor hold it back - a "neutral" rate seen by economists as about 4.5 per cent.

The bank has previously warned that official interest rates could rise about 200 basis points over the next couple of years, pushing mortgage rates to about 8 per cent.

Floating mortgage rates were about 6 per cent before today's announcement, though ANZ has just moved up its rate to 6.24 per cent.

Some economists had said that with annual inflation remaining so low, at 1.5 per cent in figures out last week, and such a high dollar, the Reserve Bank might take a pause with rate rises later in the year.

Wheeler said today the speed and extent of future rate rises would depend on economic data and the bank's assessment of inflation, including how much the high dollar would hold down inflation.

The next announcement on interest rates is due on June 12.

Headline inflation was now "moderate", but inflation pressures were increasing and were expected to continue over the next two years, so it was important to keep expectations of price rises "contained".

The economy had gained a head of steam, growing about 3.5 per cent in the year to March. Prices for New Zealand export commodities remained "very high", though auction prices for dairy products had fallen 20 per cent in recent months, the bank said.

The five-year run of extremely low interest rates and strong growth in building were supporting the economic recovery.

Strong net migration was rising, which was boosting housing and consumer demand.

Official figures out yesterday showed a net migration gain of about 32,000 in the March year, with economists predicting that to move close to 40,000 by the end of the year.

That would add to pressures on the housing market, especially in Auckland and Christchurch where there were housing shortages.

The Reserve Bank said confidence remained high for both consumers and businesses and firms planned to hire more workers.

All that meant spare capacity in the economy was being used up and inflation pressures were showing up, especially in construction and the domestic trading sectors.

The high dollar has also helped keep import prices down.

But the bank did not believe "the current level of the exchange rate is sustainable".

The dollar was trading just under US86 cents late yesterday and nudged up slightly to US86.1c shortly after today's announcement.