New Zealand Central Bank Raises Benchmark Interest Rate To 3.5%

The RBNZ raised its benchmark interest rate to 3.5% from 3.25%.

Here's the full statement from the central bank:

Statement issued by Reserve Bank Governor Graeme Wheeler:

The Reserve Bank today increased the Official Cash Rate (OCR) by 25 basis points to 3.5 percent.

New Zealand's economy is expected to grow at an annual pace of 3.7 percent over 2014. Global financial conditions remain very accommodative and are reflected in low interest rates, narrow risk spreads, and low financial market volatility. Economic growth among New Zealand's trading partners has eased slightly in the first half of 2014, but this appears to be due to temporary factors.

Construction, particularly in Canterbury, is growing strongly. At the same time, strong net immigration is adding to housing and household demand, although house price inflation has moderated further since the June Statement.

Over recent months, export prices for dairy and timber have fallen, and these will reduce primary sector incomes over the coming year. 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.

Inflation remains moderate, but strong growth in output has been absorbing spare capacity. This is expected to add to non-tradables inflation. Wage inflation is subdued, reflecting recent low inflation outcomes, increased labour force participation, and strong net immigration.

It is important that inflation expectations remain contained. Today's move will help keep future average inflation near the 2 percent target mid-point and ensure that the economic expansion can be sustained. Encouragingly, the economy appears to be adjusting to the monetary policy tightening that has taken place since the start of the year. It is prudent that there now be a period of assessment before interest rates adjust further towards a more-neutral level.

The speed and extent 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.

Following the announcement, the New Zealand dollar strengthened against the U.S. dollar.

Earlier this summer, Morgan Stanley's Sung Woen Kang said the firm expected the RBNZ to raise rates at both its June and July meetings, and did not expect the central bank to raise rates again until 2015.