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New Zealand raises interest rate to 3.5 percent

First Published      Last Updated Jul 23 2014 05:58 pm

Wellington • New Zealand raised its benchmark interest rate Thursday to 3.5 percent, but signaled it was pausing its program of rate hikes.

The announcement prompted a sharp drop in the New Zealand dollar, which was trading down nearly 1 percent at $0.8625.

New Zealand has been going it alone among developed nations this year by embarking on interest-rate tightening. Thursday marked the central bank's fourth successive hike of 0.25 percent.

However, economic conditions have changed significantly in recent months. The hikes have seen the New Zealand dollar bid up as global investors seek better returns, which has hurt exporters. And prices for dairy products, the country's leading export, have fallen.

New Zealand's Reserve Bank Governor Graeme Wheeler said in a statement that there would be "a period of assessment" before any future rate hikes. He didn't specify how long that period might last.

He said the high level of the New Zealand dollar was "unjustified and unsustainable and there is potential for a significant fall."

He also said the bank expects the economy to grow at a healthy annual rate of 3.7 percent this year, driven by construction in the city of Christchurch, which is rebuilding after a devastating earthquake three years ago.

Wheeler said inflation remains moderate and that the latest rate hike will help keep future inflation near the 2 percent target. He said strong immigration is adding to housing and consumer demand.

Most developed nations are keeping interest rates at or near record lows as they try to encourage growth following the 2008 global economic downturn.