New Zealand has increased its key interest rate to 3.25% from 3%.
The Reserve Bank of New Zealand said it expects the Kiwi dollar to decline with commodity prices. The country is a major agricultural exporter.
The Kiwi currency was slightly higher Wednesday.
It's always big news when a country's central bank raises rates, since it determines the cost of borrowing in that country's currency. The New Zealand dollar is the 10th-most traded currency in the world.
The RBNZ said in its statement that current exchange rates are not sustainable.
In Morgan Stanley's Summer Global Macro Outlook report filed this past weekend, economist Sung Woen Kang said the firm expected the central bank to raise rates by 25 basis points at both its June and July meetings.
Kang:
"We expect the RBNZ to hike 25bp in June and July to 3.5% (with downside risks in July), before taking an extended pause ahead of the September elections. A cumulative 100bp increase early on would place the RBNZ ahead of the curve and it may use the June MPS to signal a lower rate profile for the rest of the forecast horizon. The bank may be unwilling to pause in the very near term, as it could bring down fixed mortgage rates further and exacerbate the declining floating-fixed loan ratio, hence impeding the policy transmission mechanism. This would make the bank’s job more difficult down the line."
Morgan Stanley expects that after taking its benchmark interest rate to 3.5%, the RBNZ will not tighten until the second quarter of next year.
