Reserve Bank hikes official cash rate to 2.5 per cent

The Reserve Bank raised the official cash rate for the first time in more than three years to tackle inflation pressures, and signalled more increases this year.

The Monetary Policy Committee (MPC) raised the benchmark rate by 25 basis points to 2.5 per cent after being on hold since the start of the year.

The committee said inflation pressures have eased with the tentative ceasefire in the Middle East war, but the effects of the conflict would last for some time, and the outlook for inflation was uncertain.

"The outlook for medium-term inflation pressures depends on the extent to which recent cost increases feed through into higher prices."

It said the economy had been recovering until the conflict threw it off track, but it expected growth to resume.

"However, some firms may look to rebuild margins as demand recovers. If sustained, a lower exchange rate could also add to medium-term inflation pressures.

"With inflation still above target and economic activity expected to strengthen, some further reduction in monetary stimulus is likely to be required to return inflation to the 2 percent target mid-point."

It said further rate moves would depend data, price-setting behaviour, and the strength of economic activity.

The decision was unanimous, unlike the May meeting when Governor Anna Breman used her casting vote to break a three-three deadlock.

The increase was narrowly favoured by economists and financial markets, who now expect at least two further rises before the end of the year.

-RNZ