Alan Bollard

Wellington, July 29 NZPA - The Reserve Bank of New Zealand (RBNZ) lifted the official cash rate (OCR) 25 basis points to 3 percent but caught financial markets on the hop by hinting it may pause in future due to the weakness of the recovery.

The rise is only the second by the central bank. It hiked the OCR 25-basis points seven weeks ago from 2.5 percent where it had been for 13 months.

Reserve Bank Governor Alan Bollard said the pace and extent of further rate increases was likely to be more moderate than was projected in the June statement.

This caused the NZ dollar to fall from around US72.80c to around US72c and it recovered to US72.42c shortly before 5pm.

"There was some surprise in the markets at the explicit acknowledgement from the RBNZ that it may pause at some point," Christina Leung, an ASB economist, said.

A Reuters poll showed that 15 economists expect the central bank to raise the OCR to 3.25 percent on September 16. One is expecting a pause until October and one is expecting a pause until December.

"We believe a hike in September is still odds-on, but ascribe only a 60 percent chance on it," Khoon Goh, head of market economics and strategy at ANZ said.

"We remain of the view that the fourth quarter will see a pause in the tightening cycle. This seems to correctly balance the softening seen of late and the risk profile, against a taut rubber band in terms of where the OCR sits relative to neutral," he said.

The path to normalisation will be a staggered and elongated one.

Westpac noted that the softer tone to the economic data in recent weeks, both here and overseas, had prompted calls for a pause now.

"Today's statement shot down that notion from the get-go," Westpac said.

Dr Bollard said it was still appropriate to continue to reduce the extraordinary level of support implemented during recession and that the OCR was still very supportive of economic activity.

New Zealand Manufacturers and Exporters Association chief executive John Walley said the OCR rise today will stifle export growth.

"This must force some action from our politicians. The way the world is now we cannot afford to have a central bank policy that simply ignores growth today in order to focus on possible inflation a year or so down the track, particularly when most other central banks are pushing the 'lower for much longer' outlook.

"As most of the others go 'lower for much longer' the RBNZ needs to accelerate the macro-prudential measures to deal with inflation rather than using interest rates which tend to lift the exchange rate and are so damaging to the traded economy" Mr Walley said.

Dr Bollard reiterated the Reserve Bank's expectation that the coming rise in GST and other government-related charges would not have a lasting impact on inflation.

"However, the price and wage setting behaviour of firms and households will be monitored for evidence of any increase in inflation expectations," he said.

The Reserve Bank expects annual consumer price index inflation, which has been near 2 percent for the past five quarters, to temporarily push above 3 percent.