Bakers prefer butter, helping prices soar
Consumers around the world are willing to pay more for products containing dairy and this is driving demand for butter and cream, says Fonterra.
Reserve Bank Governor Graeme Wheeler noted that over recent months, export prices for dairy and timber have fallen.
And these will reduce primary sector incomes over the coming year, he says.
"With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall."
Wheeler says it is important that inflation expectations remain contained.
"Today's move will help keep future average inflation near the 2% target mid-point and ensure that the economic expansion can be sustained.
"Encouragingly, the economy appears to be adjusting to the monetary policy tightening that has taken place since the start of the year.
Wheeler also signalled a short break in another interest rate hike.
"It is prudent that there now be a period of assessment before interest rates adjust further towards a more-neutral level.
"The speed and extent to which the OCR will need to rise will depend on the assessment of the impact of the tightening in monetary policy to date, and the implications of future economic and financial data for inflationary pressures."
