NEWSRELEASE
Date 13 March 2014

ReserveBank raises OCR to 2.75 percent

Statementissued by Reserve Bank Governor Graeme Wheeler:

TheReserve Bank today increased the OCR by 25 basis points to 2.75 percent.

NewZealand’s economic expansion has considerable momentum, and growth is becomingmore broad-based. GDP is estimated to have grown by 3.3 percent in theyear to March. Growth is gradually increasing in New Zealand’s tradingpartners. However, improvements in major economies have requiredexceptional support from monetary policy. Global financial conditionscontinue to be very accommodating, with bond yields in most advanced countrieslow and equity markets performing strongly.

Prices forNew Zealand’s export commodities remain very high, and especially fordairy. Domestically, the extended period of low interest rates andcontinued strong growth in construction sector activity have supportedrecovery. A rapid increase in net immigration over the past 18 months hasalso boosted housing and consumer demand. Confidence is very high amongconsumers and businesses, and hiring and investment intentions continue toincrease.

Growth indemand has been absorbing spare capacity, and inflationary pressures arebecoming apparent, especially in the non-tradables sector. In thetradables sector, weak import price inflation and the high exchange rate haveheld down inflation. The high exchange rate remains a headwind to thetradables sector. The Bank does not believe the current level of theexchange rate is sustainable in the long run.

There hasbeen some moderation in the housing market. Restrictions on highloan-to-value ratio mortgage lending are starting to ease pressure, and risinginterest rates will have a further moderating influence. However, theincrease in net immigration flows will remain an offsetting influence.

Whileheadline inflation has been moderate, inflationary pressures are increasing andare expected to continue doing so over the next two years. In this environmentit is important that inflation expectations remain contained. To achievethis it is necessary to raise interest rates towards a level at which they areno longer adding to demand. The Bank is commencing this adjustmenttoday. The speed and extent to which the OCR will be raised will dependon economic data and our continuing assessment of emerging inflationarypressures.

Byincreasing the OCR as needed to keep future average inflation near the 2percent target mid-point, the Bank is seeking to ensure that the economicexpansion can be sustained.