Mortgage interest rates are on the rise and the New Zealand dollar jumped on Thursday after the Reserve Bank lifted its benchmark interest rate.
As expected, the central bank on Thursday raised the Official Cash Rate rate from 2.5 percent to 2.75 percent - the first increase in three years.
Announcing the increase, Reserve Bank governor Graeme Wheeler said the fast-growing economy had also prompted the bank to revise upwards the number of likely OCR rises.
The central bank is forecasting a benchmark interest rate of 3.75 percent by the end of this year and 4.75 percent by 2015. Mr Wheeler said how far interest rates need to move will depend on how households and firms respond.
The interest rate rise is already pushing up floating mortgage rates, as well as the return savers receive from bank deposits.
New Zealand's largest bank, ANZ, was the first to announce an increase on Thursday. Floating and flexible home loan rates will increase by a quarter of one percent to 5.99 percent from Monday. Rates for its savings accounts are also rising.
ANZ said while interest costs for some home loan customers will increase, more than five times as many customers will benefit from increased interest rates on savings.
The interest rate tracking website, interestdot.co.nz, shows ASB is raising rates by a quarter of a percent on three floating mortgage products and by 0.2 percent on one of its fixed term rates. It says these rises also apply to sister brands Sovereign Home Loans and Bank Direct.
KiwiBank's six-month rate has risen to 5.40 percent.
Analysts warn borrowers should brace themselves, with each percentage point rise costing a family $20 a week for each $100,000 borrowed.
Shamubeel Eaqub, principal economist at the New Zealand Institute of Economic Research, told Radio New Zealand's Nine to Noon programme on Thursday that floating mortgage rates will probably reach 7.5 percent by the end of 2015.
The Reserve Bank noted the housing market had cooled due to lending restrictions it put in place in October 2013 and higher interest rates will moderate the market further, though the rise in immigration will continue to support it.
BNZ economist backs Reserve Bank inflation stance
BNZ head of research Stephen Toplis said the Reserve Bank is right to signal faster interest rate rises to keep inflation in check.
"If you're of the view, as we are, that the economy is moving back towards more normal rates of growth, then interest rates have to move back towards more normal levels.
"It's a moot point where that is but we think a cash rate of some around 4 to 4.5 percent is normal and we want to get back there very quickly and that's what the Reserve Bank is suggesting."
NZ dollar up
The Kiwi rose more than half a cent against the US currency following the announcement, hitting a five-month high of US85.60 cents at 5pm on Thursday.
Westpac currency strategist Imre Spiezer said the prospect of higher interest rates had made the New Zealand dollar even more attractive. He expects it to hit US86 cents soon and possibly reach US88 cents in the next 12 months.
Before Thursday's decision, the benchmark interest rate had been at 2.5 percent - a record low since March 2011. At that time, the Reserve Bank cut the cost of borrowing from 3 percent in response to the devastating earthquake in Canterbury the previous month.
Mr Wheeler said in his statement on Thursday that economic expansion has considerable momentum and the bank estimated growth of 3.3 percent in the year to March, led by high dairy prices, the rebuild in Canterbury, strong business and consumer confidence and rising immigration.
While inflation remains modest, Mr Wheeler said, growth in demand was absorbing spare productive capacity and inflation pressures were increasing, especially in the construction sector.
Terms of trade are at a 40-year high due to higher commodity prices, Mr Wheeler said. The Reserve Bank expected these prices to remain high by historical standards due to strong demand from Asia.
Stronger commodity prices and expectations of rising interest rates would underpin a higher dollar, which the central bank said would hit exporters.