WELLINGTON, New Zealand – In another sign the world economy is finally picking up steam after five years of recession and anemic growth, New Zealand on Thursday embarked on a series of interest rate hikes.
New Zealand’s Reserve Bank raised its benchmark interest rate by quarter of a percentage point to 2.75 per cent after holding it at a record low for three years. The bank indicated it plans to continue raising rates to about 5 per cent by March 2017.
The South Pacific 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 there three years ago that destroyed much of the downtown.
Economic growth has reached a healthy 3.5 per cent and house prices have increased at a pace rapid enough to concern policy makers.
The rate hike makes New Zealand a rarity among developed nations since the 2008 financial crisis.
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. Sweden raised interest rates in 2010 and 2011 but then reversed course, as did the European Central Bank after its 2011 rate hike.
The U.S. central bank, meanwhile, is reducing the level of extraordinary stimulus it has been giving the economy through bond purchases. Even after that stimulus is phased out, the Federal Reserve is expected to keep interest rates at record lows.
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.
The Kiwi dollar as New Zealand’s currency is known was trading up about 0.5 per cent against the U.S. dollar Thursday at 85 cents.
Reserve Bank Governor Graeme Wheeler said Thursday the speed and extent of interest rate hikes will 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 tradeables sector,” he said. “The bank does not believe the current level of the exchange rate is sustainable in the long run.”
In its 2014 outlook, the OECD predicted New Zealand’s economy will expand by 3.3 per cent, more than the 2.9 per cent in the U.S., 2.6 per cent in neighbouring Australia, and 1 per cent in the euro area.
Economic surveys indicate that everyone from New Zealand business owners to consumers are more confident than they have been since before the 2008 downturn. Unemployment remains a manageable 6 per cent, and some farmers in the agricultural-driven economy have never experienced such good times.
The improving economy also seems to be slowing the exodus of residents to Australia, which boasts higher living standards than New Zealand and weathered the financial crisis better than almost every other nation thanks to a mineral boom. But Australia’s economy has begun slowing, just as New Zealand’s takes off.