New Zealand hikes key interest rate to 4.75% despite cyclone

CHRISTCHURCH, New Zealand -

New Zealand's central bank raised its benchmark interest rate by a half-point Wednesday to 4.75% as it continues trying to wrestle down inflation.

The increase, which can raise the borrowing costs for consumers on everything from credit cards to mortgages, comes despite the economic pain that a devastating cyclone is already inflicting on many people. The bank said that over time, the cyclone rebuild will only add to inflationary pressures.

Cyclone Gabrielle hit New Zealand last week, killing 11 people and causing billions of dollars in damage to homes and infrastructure.

Reserve Bank Governor Adrian Orr said the committee that makes interest rate decisions agreed the rate needed to increase to ensure that inflation returned to the bank's target of around 2% from its current level of 7.2%.

Orr said that while there were some early signs price pressures are easing, core inflation remained too high and employment was at its maximum sustainable level, with the unemployment rate at a low 3.4%.

"Cyclone Gabrielle and other recent severe weather events have had a devastating effect on the lives of many New Zealanders," Orr said. "It is too early to accurately assess the monetary policy implications of these weather events, given that the scale of destruction and economic disruption are only now becoming evident."

Orr said the committee believes that the disaster is likely to increase prices for some goods over the coming weeks, while having a negative impact on economic activity and exports. He noted that the government had yet to determine the scale and timing of its economic response to the cyclone.

The 0.5% rate rise comes after a record 0.75% hike in November. At 4.75%, the official cash rate is at the highest level it has been since early 2009, soon after the global financial crisis.

The rate increase was in line with market expectations, and the currency was little changed, with 1 New Zealand dollar trading at about US$0.62.

New Zealand's key interest rate is now similar to the U.S. rate of 4.5% to 4.75% but is higher than in many other developed nations including neighboring Australia, where the rate is 3.35%.