New Zealand's central bank raised interest rates by 0.25 percent to 3.25 percent and signaled that more rate hikes could be expected later this year. The Reserve Bank left its 90-day bank bill forecast unchanged, suggesting borrowing costs could rise twice more this year.
"It is important that inflation expectations remain contained and that interest rates return to a more neutral level," said Reserve Bank Governor Graeme Wheeler.
Increasing the nation's official cash rate saw the New Zealand dollar, or kiwi, rise sharply. The kiwi climbed as high as 86.52 U.S. cents, before settling to 86.41 as of 2:08 p.m. in Wellington.
"The bank does not believe the exchange rate is sustainable at current levels," Wheeler said. "The exchange rate has not yet adjusted to weakening commodity prices, but is expected to do so."
The RBNZ said inflation would not reach the 2 percent midpoint of its target range until mid-2015, nearly a year later than previously estimated. Currently, a stronger currency and low prices on imports are keeping inflation in check.
Wheeler earlier this year said interest rates could rise as high as 3.75 percent, an increase of 125 basis points. Analysts polled by Bloomberg, however, forecast an increase to 3.5 percent.