New Zealand Reserve Bank governor Graeme Wheeler has raised the official cash rate (OCR) as expected, while signalling a pause in future hikes to assess the impact of moves so far in 2014.
The kiwi dollar sank after Wheeler said its strength was “unjustified” and that the currency could have “a significant fall”.
“Encouragingly, the economy appears to be adjusting to the monetary policy tightening that has taken place since the start of the year,” Mr Wheeler said on Thursday.
“It is prudent that there now be a period of assessment before interest rates adjust further towards a more-neutral level.”
The quarter point increase in the OCR to 3.5 per cent was forecast by all 16 economists in a Reuters survey. The market has become increasingly convinced that the central bank will wait, possibly until 2015, before hiking again in the face of falling commodity prices, relatively tame inflation and signs house price inflation is moderating.
The New Zealand dollar dropped to US86.31 cents from US87.02c immediately before the statement was released.
The trade-weighted index fell to 80.35 from 80.97.
The New Zealand economy is expected to grow at an “annual average” pace of 3.7 per cent in 2014.
Construction, particularly in Canterbury, was “growing strongly”, with strong net migration adding to housing and household demand. But house price inflation “has moderated further since the June statement”.
Mr Wheeler also noted the decline in export prices for dairy products and timber, saying that “would reduce primary sector incomes over the coming year”.
“With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall,” he said.
The Reuters survey shows that before Thursday economists were expecting the OCR to rise again in December to 3.75 per cent, reach four per cent by March and 4.25 per cent by June next year.
Wheeler repeated that inflation “remains moderate”.