For the second time in six weeks the Reserve Bank has lifted the interest-driving official cash rate - by 25 points this time to 3% - but it has indicated the likelihood of more rises has been reduced because of the fragility of the global economic recovery.
The rise, which was widely expected, follows 13-months where the OCR sat at a low of 2.5% before its first shift in June.
Before the Reserve Bank announcement the New Zealand dollar fell to US72.09c from US72.66c, and then it traded lower, around US72.3, in the mid-afternoon.
ASB chief economist Nick Tuffley said the Reserve Bank's economic outlook was "slightly softer" when compared to its June outlook and in particular acknowledged prospects for trading partner growth had deteriorated.
In June, the bank had been "very upbeat" on trading partner growth prospects for 2011.
"The Reserve Bank continues to highlight the high levels of commodity prices, although these have moderated in recent weeks.
The bank also mentioned the recent slowing in net migration, which is likely to be contributing to a weaker outlook for consumer spending and the housing market," Mr Tuffley said in a statement.
The data flow between June and July provided the Reserve Bank with a "reality check" on its previously optimistic forecasts, but it remained positive, noting that near-term GDP growth will remain "respectable", being supported by the export sector; manufacturing and forestry in particular.
Reserve Bank Governor Alan Bollard said although the outlook for economic growth has "softened somewhat", it was still appropriate to continue to reduce the extraordinary level of support implemented during the 2008-09 recession.
"The world economy continues its fragile recovery. Trading partner growth has turned out stronger than we predicted. However, future prospects for growth have deteriorated.
"While still at high levels, our commodity prices have moderated," Dr Bollard said in a statement.
He said "the pace and extent" of further OCR increases was likely to be "more moderate" than was projected in the June Statement and the Reserve Bank's policy assessment would be continually reviewed in light of economic and financial market developments.
Households were being cautious, with retail spending growing only modestly, housing turnover was in decline and household credit growth weak.
"While this caution has been evident for some time, the recent slowing in net immigration will act to further dampen consumer spending. Business investment remains very low, with corporate lending continuing to be subdued," Dr Bollard said.
He said the annual consumer price index [reflecting] inflation has been near 2% for the past five quarters and as the economy grows, inflationary pressures are expected to pick up with the coming increase in GST and other government-related price changes "likely to temporarily push" annual CPI inflation above 3%.
"The Bank does not expect this price spike to have a lasting impact on inflation," he said.
