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New Zealand to take breather after another rate hike

New Zealand's central bank lifted interest rates for the fourth time this year on Thursday (July 24) but signalled a pause in further tightening, sending the local currency to a six-week low. 

WELLINGTON: New Zealand's central bank lifted interest rates for the fourth time this year on Thursday (July 24) but signalled a pause in further tightening, sending the local currency to a six-week low. The Reserve Bank of New Zealand raised the official cash rate (OCR) 0.25 points to 3.50 per cent in a move that was widely expected in financial markets.

The OCR has gone up 100 basis points since March, when New Zealand became the first advanced economy to tighten monetary policy since 2012.

Reserve Bank governor Graeme Wheeler said the latest rise in the cost of borrowing was needed to keep inflation contained within the bank's 1.0-3.0 per cent target. "Today's move will help keep future average inflation near the 2.0 per cent target mid-point and ensure that the economic expansion can be sustained," he said.

But Wheeler said the time had come to temporarily halt the rate hikes and assess their impact on the economy, which is growing at a strong rate of 3.7 per cent a year. "Encouragingly, the economy appears to be adjusting to the monetary policy tightening that has taken place since the start of the year," he said. "It is prudent that there now be a period of assessment before interest rates adjust further towards a more-neutral level."

The prospect of a temporary rate freeze sent the New Zealand dollar tumbling almost a cent to 86.06 US cents, down from 87.02 US cent immediately before the announcement.

The markets were also responding to comments from Wheeler, who has long complained that the "Kiwi" is over-valued but ramped up his rhetoric in Thursday's monetary policy statement. "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," he warned.

The Reserve Bank held interest rates artificially low at 2.5 per cent for three years to help cushion the economy from the impact of a devastating earthquake in 2011 that flattened the South Island city of Christchurch. But the economy has bounced back recently, recording some of the strongest growth in the OECD thanks to a massive rebuild in Christchurch, a housing boom in Auckland and strong agricultural exports to China.

As well as allowing the Reserve Bank to track the impact of rate hikes, the monetary pause policy also places the independent bank on the sidelines as political campaigning for a September 17 general election heats up.

Wheeler did not indicate how long the freeze would last but TD Securities head of Asia-Pacific research Annette Beacher said she expected hikes to resume in December. She said the Reserve Bank's interpretation of a "neutral" level for interest rates appeared to be about 4.5 percent, predicting the OCR would peak at that level by September 2015. 

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