The Reserve Bank of New Zealand (RBNZ) on Thursday raised interest rates by 25 basis points to 2.75 percent after three years at the historic low of 2. 5 percent, citing accelerating economic growth at home and abroad and rising immigration.
New Zealand's economic expansion had considerable momentum, and growth was becoming more broad-based, RBNZ governor Graeme Wheeler said in a statement.
"GDP is estimated to have grown by 3.3 percent in the year to March. Growth is gradually increasing in New Zealand's trading partners. However, improvements in major economies have required exceptional support from monetary policy," said Wheeler.
Prices for New Zealand's export commodities remained very high, especially for dairy.
"Domestically, the extended period of low interest rates and continued strong growth in construction sector activity have supported recovery," he said.
A rapid increase in net immigration over the past 18 months had also boosted housing and consumer demand, while confidence was very high among consumers and businesses, and hiring and investment intentions continued to increase.
"Growth in demand has been absorbing spare capacity, and inflationary pressures are becoming apparent, especially in the non-tradables sector. In the tradables sector, weak import price inflation and the high exchange rate have held down inflation," he said.
The high exchange rate remained a headwind to the tradables sector and the RBNZ believed it was unsustainable in the long run.
Restrictions on high loan-to-value ratio mortgage lending imposed in October last year were starting to ease pressure in the housing market, and rising interest rates would have a further moderating influence.
"However, the increase in net immigration flows will remain an offsetting influence," he said.
Inflationary pressures were increasing and were expected to continue growing over the next two years.
"In this environment it is important that inflation expectations remain contained. To achieve this, it is necessary to raise interest rates towards a level at which they are no longer adding to demand," he said.
Further increases in the official cash rate (OCR) would depend on economic data and continuing assessment of emerging inflationary pressures.
By increasing the OCR to keep future average inflation near the 2-percent mid-point of the 1-percent to 3-percent target range, the RBNZ was seeking to ensure that economic expansion could be sustained, he said.
The OCR had been held at 2.5 percent since March 2011./.