WELLINGTON, N.Z. (MNI) – The Reserve Bank Wednesday increased the
Official Cash Rate (OCR) by 25 basis points to 2.75 percent. The
following is the rest of the text of the announcement:

Reserve Bank Governor Alan Bollard said: “The economy has entered
its second year of recovery with growth becoming more broad-based.

“The recovery in trading partner activity is continuing, with
growth in Asia particularly strong. Along with ongoing growth in
Australia and recovery in the United States, this has so far offset weak
growth in some other export markets. Against this backdrop, New
Zealand’s export commodity prices have increased sharply over the past
few months, boosting export incomes.

“In contrast to signs of global economic recovery there has been
renewed turmoil in financial markets. Currently, we expect the main
impact on New Zealand to come through continuing upward pressure on the
cost of funds to the banking system.

“In New Zealand, growth of around 3 percent is expected this year
and next. The main drivers of this outlook are higher export prices and
volume growth, an improving labour market and a pick-up in residential
and business investment. However, we expect households to remain
relatively cautious, with the housing market and credit growth staying
subdued. This moderate household spending contributes to some
rebalancing in the economy.

“Underlying CPI inflation is expected to track within the target
range even as the economy expands further. That said, headline CPI
inflation will be boosted temporarily by the announced increase in GST
and other government-related price changes. Provided households and
firms do not reflect this price spike in their wage and price-setting
behaviours we do not expect a lasting impact on inflation.

“Given this outlook and as previously signalled, we have decided to
begin removing some of the monetary policy stimulus that is currently in
place. The further removal of stimulus will be reviewed in light of
economic and financial market developments.

“The fact that bank funding costs are higher, long-term interest
rates are higher than short-term interest rates, and a greater
proportion of borrowers use floating rate mortgages should all reduce
the extent to which the OCR will need to be increased relative to
previous cycles.”

** Market News International **

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