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New Zealand raises key interest rate to 3 percent

April 23, 2014

WELLINGTON, New Zealand (AP) — With its economy continuing to improve, New Zealand on Thursday raised its benchmark interest rate for the second time in six weeks, to 3 percent.

New Zealand is forging its own path on rates after most developed nations continue to try and stimulate their economies by keeping rates at or near historic lows following the 2008 financial crisis. But as the world economy continues to recover, other nations will likely also consider rate hikes.

Reserve Bank of New Zealand Governor Graeme Wheeler announced a hike of 0.25 percent in the key rate after raising it by the same increment in March. Before that, the bank had kept the rate at a historic low of 2.5 percent for three years.

New Zealand’s economy grew by 3.5 percent over the past year.

In a statement, Wheeler said inflationary pressures are increasing and it’s important to keep them contained.

“To achieve this it is necessary to raise interest rates towards a level at which they are no longer adding to demand,” he said, adding that the speed and extent of rate hikes will remain dependent on economic data.

Wheeler also noted there has been some moderation in the housing market, which had risen quickly enough over the past year to worry the bank, and that the prices for New Zealand’s dairy exports had fallen in recent months although remained high.

The New Zealand dollar was little changed after the announcement and was trading at about $0.86. That is high by historic measures and is hurting exporters.

The South Pacific nation of 4.5 million has benefited from booming demand in China for its milk products and the gathering pace of a rebuilding effort in the city of Christchurch following an earthquake there three years ago that destroyed much of the downtown.

Some developing economies including Turkey and South Africa have raised rates in recent months, but in those cases it was an attempt to shore up their currencies rather than preventing a boom from overheating. Sweden raised interest rates in 2010 and 2011 but then reversed course, as did the European Central Bank after its 2011 rate hike.

The U.S. central bank, meanwhile, is reducing the level of extraordinary stimulus it has been giving the economy through bond purchases. Even after that stimulus is phased out, the Federal Reserve is expected to keep interest rates at record lows.

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