In another sign the world economy is finally picking up steam after five years of recession and anemic growth, New Zealand yesterday became the first developed nation to embark on a series of interest rate hikes.
The Reserve Bank of New Zealand raised its benchmark interest rate by quarter of a percentage point to 2.75 percent after holding it at a record low for three years. The bank indicated it plans to continue raising rates to about 5 percent by March 2017.
The nation of 4.5 million has benefited from booming demand in China for its milk products and the gathering pace of a rebuilding effort in the city of Christchurch following an earthquake three years ago that destroyed much of the downtown.
Economic growth has reached a healthy 3.5 percent and housing prices have increased at a pace rapid enough to concern policymakers.
By raising rates, the Reserve Bank aims to tame both inflationary pressures and house price increases, but also runs the risk of elevating an exchange rate it already considers too high, making exports less competitive.
New Zealand’s currency was trading up about 0.5 percent against the US dollar yesterday at NZ$0.85.
Reserve Bank Governor Graeme Wheeler said the speed and extent of interest rate hikes would be determined by the bank’s assessment of emerging inflationary pressures.
“New Zealand’s economic expansion has considerable momentum, and growth is becoming more broad-based,” he said.
“The high exchange rate remains a headwind to the tradables sector,” he said. “The bank does not believe the current level of the exchange rate is sustainable in the long run.”
Meanwhile, South Korea’s central bank yesterday kept its key interest rate unchanged at 2.5 percent for the 10th consecutive month, citing mixed signs of a global recovery.
“The US economy continues to rebound and the slowdown in the eurozone showed signs of abating, while growth in emerging markets slowed,” the Bank of Korea said in a statement.
The impact of a move by the US Federal Reserve to taper its monetary-easing policy remains a potential threat, it added.
The central bank of Asia’s fourth-largest economy has left the key rate unchanged since an unexpected 0.25 percent cut in May last year.
In Bangkok, the Bank of Thailand on Wednesday reduced its official interest rate to the lowest level in three years to boost the economy in the face of a protracted political crisis.
The bank lowered its policy rate by 0.25 percentage points, to 2 percent — a level last seen in January 2011. It is the second time since November last year that the Thai central bank has lowered borrowing costs to cushion the blow of political turmoil.
Some developing economies, including Turkey and South Africa, have recently raised rates, but in those cases it was an attempt to shore up their currencies rather than preventing a boom from overheating.
Additional reporting by AFP