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New Zealand break ranks to hike interest rates

WELLINGTON--New Zealand on Thursday became the first advanced economy to raise interest rates since 2012, ending a three-year freeze imposed after the devastating Christchurch earthquake.

In a widely anticipated move, the Reserve Bank of New Zealand lifted the official cash rate (OCR) 0.25 points to 2.75 percent and said it planned more hikes in an economy that was growing with “considerable momentum.”

The bank's governor Graeme Wheeler said rates no longer needed to be kept at a record low and could return to “normal” levels, sending the New Zealand dollar to a five-month high against the greenback.

“The bank's assessment is that the Official Cash Rate will need to rise by about two percentage points over the next two years for inflation to settle,” he said.

The 6.3-magnitude Christchurch earthquake in February 2011 leveled much of New Zealand's second largest city, claiming 185 lives and prompting the bank to slash rates in an emergency move to protect the economy.

Since then, New Zealand has experienced strong growth thanks to a booming housing market, growing global demand for primary products such as dairy, and a NZ$40 billion (US$33.9 billion) program to rebuild the shattered South Island city.

But the massive construction spending has fuelled inflation and Wheeler said the bank was determined to keep the cost of living within the bank's 1.0-3.0 percent target band.

“The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures,” he said.

Capital Economics analyst Gareth Leather said no advanced economy had lifted interest rates since 2012.

He expected the OCR to rise to 3.25 percent by the end of the year, with some analysts tipped it will peak at 5.5 percent by late 2016.

'Rock star economy'

The last time New Zealand lifted the OCR was in July 2010, when so-called “green shoots” of economic recovery were emerging, only to be overwhelmed by fresh problems such as Europe's debt crisis.

in response, central banks in developed countries dropped interest rates to ultra-low levels in a bid to stimulate growth.

While Wheeler noted some signs of recovery in New Zealand's global trading partners, Westpac New Zealand chief economist Dominick Stephens said other advanced economies would not rush to follow New Zealand's lead.

He said the earthquake rebuild and New Zealand's strong terms of trade — the price that other countries pay for its exports — made it a special case.

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