Reserve Bank lifts interest rates for 2nd time in month

9.15am

Reserve Bank Governor Don Brash this morning lifted interest rates for the second time in a month, citing a strong economy as the reason for doing so.

Following the bank's review of rates between Monetary Policy Statements, Dr Brash lifted the Official Cash Rate (OCR) by a quarter of a percentage point to 5.25 per cent.

Dr Brash surprised many in his March 20 quarterly Monetary Policy Statement by lifting the OCR by the same amount.

Last month's rise prompted most banks to hike mortgage and business lending rates by half a percentage point.

They are almost certain to announce another rise today or later this week, but possibly only matching the RB's rise this time.

"It is clear from December GDP data that domestic demand has been growing strongly, and most information for the March quarter points in the same direction," Dr Brash said.

"Retail spending has been very strong, and house sales suggest a buoyant residential property market. Both business and consumer confidence continue to be high."

Dr Brash said the world economy, though not nearly as buoyant on average as the New Zealand economy, appeared to be continuing a gradual recovery.

"All in all, and given the outlook for inflation, a further moderate adjustment in the Official Cash Rate seems appropriate," he said.

Sweden last month beat New Zealand by just a few hours in raising its official rates, but until last night they were the only two in the industrialised OECD club to have lifted rates in the current global recovery from September 11.

But Dr Brash would have taken comfort that they were joined last night by Canada, which raised its overnight rate by a quarter of percentage point to 2.25 per cent, citing stronger than expected growth in the United States and Canada.

Dr Brash had been looking decidedly lonely when the Reserve Bank of Australia on April 3 surprised markets by deciding to leave its cash rate steady at 4.25 per cent. RBA Governor Ian Macfarlane said then that Australia would take a cautious approach.

Such caution has not disuaded Dr Brash despite criticism from both business and unions for raising rates last month. They said then he had acted prematurely and was in danger of snuffing out economic recovery before it had properly got going.

But Dr Brash said the economy was already working at near its capacity and his action was not so much hitting on the brakes as taking his foot off the accelerator.

He said that in all his time as governor he had yet to hear business or unions applaud him for putting up rates.

Economists had widely expected Dr Brash to move today and they expect him to lift rates for a third time next month at the bank's next Monetary Policy Statement.

Some thought he might even lift rates by half a percentage point today, but that concern receded yesterday when the March Consumer Price Index came out lower than expected. It rose by 0.6 per cent to 2.6 per cent.

However, it is expected to rise close to the top of the Reserve Bank's 0-3 per cent inflation target next quarter as petrol price rises and higher house prices feed through.

The New Zealand dollar hardly moved following the announcement, rising just a point to US44.15c, indicating the market had already priced the rise in.

- NZPA