24 Jul 2014

Reserve Bank raises rates again

5:21 pm on 24 July 2014

The Reserve Bank has increased its benchmark interest rate to 3.5 percent, in the fourth rise this year.

The rise on Thursday morning is the fourth this year and brings the Official Cash Rate to its highest level since early 2009.

Reserve Bank Governor Graeme Wheeler

Reserve Bank Governor Graeme Wheeler Photo: RNZ / Diego Opatowski

The central bank says the economy is growing strongly underpinned by the rebuilding of Christchurch and stronger immigration.

The economy is expected to grow at an annual pace of 3.7 percent this year.

While inflation remains subdued, the Reserve Bank says pressures are building as the economy runs out of spare capacity, particularly in the building sector.

It warns the New Zealand dollar remains unsustainably high despite sharp falls in dairy and timber prices and there is the potential for a significant fall.

Reserve Bank Governor Graeme Wheeler reiterated that inflation expectations had to be contained to ensure the economic expansion is sustainable.

But he noted the pace of growth had moderated in the wake of rising interest rates, and further increases are on hold for now.

Businesses and unions say it's about time, as the high dollar has hurt exporters and cost jobs.

But any relief may be short-lived, with economists saying the construction boom and strong immigration will continue to stoke inflation pressures.

ANZ chief economist Cameron Bagrie is predicting interest rates will stay on hold until March next year though any movement could be as early as December.

That will bring some relief to businesses and unions, who fear the economy could stall.

Council of Trade Unions economist Bill Rosenberg said higher rates had already cost jobs. "We're seeing clear signs of harm to the economy and particularly to manufacturing at the moment - just a week ago Buckley Systems announced they were laying off 36 staff."

The dollar fell almost a cent to US86 cents after the Reserve Bank said the currency was unjustifiably and unsustainably high.