Reserve Bank Of New Zealand Raises OCR To Record 8.0%, Thursday, June 07, 2007 3:49:31 AM

Reserve Bank of New Zealand unexpectedly raised the Official Cash Rate -OCR by 25 basis points to a record 8.0%, the central bank said Thursday. This is the second hike this year. The bank had earlier raised rates by a similar margin in April.

Reserve Bank Governor Alan Bollard said, “Domestic demand has grown strongly since late 2006, particularly in the household sector. Housing market activity has been buoyant, consumer confidence has remained relatively robust and a range of business sector indicators, including employment and investment intentions, have been strong. As we have noted recently, government spending continues to increase, which is contributing to domestic demand.”

The bank observed that firms` capacity utilization remained stretched and finding both skilled and unskilled staff became increasingly difficult, which would likely trigger inflationary pressure.

“A sustained period of slower growth in domestic activity will be required to alleviate inflation pressures,” the governor said.

Domestic demand and economic activity looked up, despite past hikes in OCR, bank noted. The central bank said that a rise in dairy sector incomes will provide a substantial boost to economic activity over the next few years, but with added inflation pressures.

“Had we not increased the OCR this year, it is likely that the inflation outlook would now be looking uncomfortably high. This incremental increase in the OCR is to ensure that inflation outcomes remain consistent with achieving the target of 1.0 to 3.0% inflation on average over the medium term,” Bollard said.

New Zealand`s annualized CPI rose 2.5% in the first quarter and unemployment rate slipped 0.1 percentage point on year to 3.8%, reflecting a tighter labor market. According to the statistics New Zealand, salary and wage rates, including overtime increased 3.1% annually in the first quarter, with overtime wage rates rising 3.8%.

For the year ended April, new dwelling consents rose 2.4% on year, with the value of consents amounting to NZ$575 million, up 30.0% over previous year.

The economy expanded an annualized 1.5% in the December quarter, with a sequential rise of 0.8%. Domestic spending rose 2.6% on quarter, with household consumption climbing 1.1% in the December quarter, following a 0.3% gain in the prior quarter. The government is due to release the GDP report for the first quarter on June 29.

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