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WELLINGTON - New Zealand's central bank surprised economists Thursday by raising the official interest rate in an attempt to contain persistent inflationary pressures.
Reserve Bank of New Zealand governor Alan Bollard raised the official cash rate from 7.75 percent to 8.0 percent, one of the highest rates in the developed world.
Most economists had expected Bollard to keep rates on hold following two consecutive rises at the previous two reviews. But Bollard said he had to act to keep inflation within the central bank's mandated range of one to three percent.
"A sustained period of slower growth in domestic activity will be required to alleviate inflation pressures," he said.
Domestic demand has been growing since late 2006 after a slowdown earlier in the year and a strong housing market has driven growing household consumption and debt.
Bollard said a boom in the dairy industry, one of the most important export sectors in New Zealand, would fuel the economy and inflation over the next few years.
Recent rises in lending rates have not yet had an impact on domestic demand and inflation pressures, he said.
"There are some early indications from recent opinion surveys and other data that growth may be starting to soften, but these are by no means conclusive.
"Indeed, at present the risks to domestic activity appear to remain on the upside."
The bank forecasts economic growth to rise from 1.7 percent in the March 2007 year to 3.1 percent in the current year to March.
Inflation has moderated in recent months, mainly due to lower oil prices, but the central bank says medium term pressures in the domestic economy remain high.
It expects inflation to fall from the current 2.5 percent to 2.2 percent in the March 2008 year before climbing close to the top of its one to three percent range the following year.
Bollard acknowledged the high interest rates and the strong New Zealand dollar were hurting exporters outside the dairy industry.
"As we noted in April, the exchange rate is at levels that are both exceptionally high and unjustified on the basis of New Zealand's medium-term fundamentals."
The New Zealand dollar, which has been bought heavily by foreign investors because of the high interest rates on offer, Thursday rose to new highs since the currency was floated in 1985.
Following the rates announcement, the local dollar rose to 75.50 US cents from 75.10 shortly before and peaked at 75.66 before easing slightly. - AFP/ir
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