The Reserve Bank of New Zealand's interest rate rise has cemented its status at the head of the developed world's economic cycle, but Australia's huge jobs gain means it may not be far behind.
The RBNZ raised the cash rate one-quarter of a percentage point to 2.75 per cent on Thursday, as expected, before Australian employment figures showed the best jobs growth in two years, with 47,000 new positions created during February. The employment data suggests the jobs market has caught up with the acceleration in the rest of the economy and resolves a worrying lag.
New Zealand is further ahead of Australia, thanks to a terms-of-trade boom that is underpinned by demand for Kiwi dairy exports, mostly attributed to China and India. RBNZ governor Graeme Wheeler said: ''By increasing the [official cash rate] as needed to keep future average inflation near the 2 per cent target mid-point, the bank is seeking to ensure that the economic expansion can be sustained.''
The RBNZ also upgraded its growth forecast to 3 per cent from 2.8 per cent for 2014, thanks to $NZ40 billion ($37.79 billion) in construction activity in Christchurch and the expansion of the housing supply elsewhere in New Zealand.
With that comes an inflation risk that needs to be contained.
The New Zealand Manufacturers and Exporters Association said it was yet to see a policy response from the RBNZ that addressed the high currency.
''Early increases in our OCR put us further out of line with the rest of the world in terms of monetary policy, which will have the effect of appreciating our already overvalued exchange rate,'' chief executive John Walley said.
''This is a major concern for exporters and import-competing manufacturers. For the traded sector the exchange rate determines what sort of margin gets banked, and margins are thin right now.''
HSBC chief economist Paul Bloxham said by the second half of this year, interest rate rises should push the New Zealand dollar to parity with the Aussie.
''That would be the first time in 40 years that it happened if it does arrive,'' said Mr Bloxham.
''They'll pop the champagne because the NZ dollar gets to parity, but they'll have a big hangover the next day because Australia is still NZ's major trading partner.
''A high currency will make their traders less competitive.'' After the RBNZ's decision the New Zealand dollar rose to above US85¢ and was fetching A94.8¢.
Mr Bloxham said it made sense that the currency was so high.
''You have got to keep in mind that the economy in NZ is growing very strongly and it's quite broad-based, and because of that, in a world where the rest of the developed world is picking up but not particularly strongly, it makes sense that the NZ dollar is very high.''
New Zealand's official cash rate has been at a low of just 2.5 per cent since early 2009, apart from a small lift in 2010 that was reversed in early 2011. That has seen mortgage rates at their lowest levels for about 50 years, in the wake of the global financial crisis.
Last December, the RBNZ signalled that the interest rate would rise 200 basis points to 4.5 per cent by the end of 2015.
That would see rates near ''neutral'' levels, neither speeding up nor slowing down the economy.