Governor Alan Bollard said "An increase in the OCR appears warranted to ensure that inflation remains comfortably within the target range over the medium term.
"The New Zealand economy has experienced a period of impressive growth over the past two years. But now productive capacity and the labour market are becoming relatively tight.
Reflecting this, inflation pressures in some parts of the domestic economy have started to become more apparent.
Although falling import prices due to the rising exchange rate have so far kept CPI inflation low, those reductions are unlikely to be sustained.
If domestic inflation is left unchecked, the CPI may start to rise to uncomfortable levels.
"Data since December have pointed to stronger activity than we then thought in areas such as household spending, construction and the housing market, further fuelling inflation.
Further inflation pressure is likely in the next few months from areas such as construction costs and energy. Interest rates have been stimulating demand as shown in further solid growth in household credit.
"On balance, these developments strengthen our view, foreshadowed in our December Monetary Policy Statement (MPS), that it is now prudent to begin returning interest rates to levels that will have less stimulatory effects on demand.
By historical standards we do not expect that a large adjustment in interest rates will be necessary.
"By raising interest rates now, we hope to avoid having to increase interest rates more aggressively later on.
"The New Zealand dollar has risen sharply, and we are aware that this has placed pressure on the export sector.
However, as yet this has not had much effect on spending in the local economy. In time this will happen, probably reducing the need for interest rates to rise as much as they otherwise might.
We will need to monitor these trends, and will be reviewing the OCR in early March with the release of our next MPS".
