Reserve Bank of New Zealand Surprises, Raises Rates To 7.75 Percent

New Zealand’s central bank raised rates another 25 basis points to 7.75 percent, a record and the highest rate of return offered among industrialized economies. The second increase in seven weeks, the move was widely perceived as a surprise with futures contracts expecting a hike later on in the quarter, if not the second half of the year. Although not commenting on further rate hikes in the near term, Reserve Bank Governor Alan Bollard stated that “the resurgence in economic activity that began in late 2006 has continued over recent months, with domestic demand continuing to expand strongly?..the lift in domestic demand is placing further pressure on already stretched productive resources.” Attempting to curb housing demand and rampant consumer spending, Governor Bollard is also contending with inflationary pressures that at the top end of the bank’s 1-3 percent benchmark range. Subsequently, Bollard also commented on exchange rate fluctuations and their negative contribution on near term economic conditions. “The exchange rate is now at levels that are both exceptional by historical standard, and unjustified on the basis of medium term fundamentals.” Bullish for the New Zealand dollar, traders contended the necessity of the rate hike, taking the currency higher by 60 basis points initially and then back down to 0.7447 in New York evening trading.