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New Zealand raises interest rate to 2.75 percent

By NICK PERRY

WELLINGTON, New Zealand (AP) a¿¿ In another sign the world economy is finally picking up steam after five years of recession and anemic growth, New Zealand on Thursday embarked on a series of interest rate hikes.

New Zealand's Reserve Bank raised its benchmark interest rate by quarter of a percentage point to 2.75 percent after holding it at a record low for three years. The bank indicated it plans to continue raising rates to about 5 percent by March 2017.

The South Pacific nation of 4.5 million has benefited from booming demand in China for its milk products and the gathering pace of a rebuilding effort in the city of Christchurch following an earthquake there three years ago that destroyed much of the downtown.

Economic growth has reached a healthy 3.5 percent and house prices have increased at a pace rapid enough to concern policy makers.

The rate hike makes New Zealand a rarity among developed nations since the 2008 financial crisis.

Some developing economies including Turkey and South Africa have recently raised rates, but in those cases it was an attempt to shore up their currencies rather than preventing a boom from overheating. Sweden raised interest rates in 2010 and 2011 but then reversed course, as did the European Central Bank after its 2011 rate hike.

The U.S. central bank, meanwhile, is reducing the level of extraordinary stimulus it has been giving the economy through bond purchases. Even after that stimulus is phased out, the Federal Reserve is expected to keep interest rates at record lows.

By raising rates, the Reserve Bank aims to tame both inflationary pressures and house price increases but also runs the risk of elevating an exchange rate it already considers too high, making exports less competitive.

The Kiwi dollar as New Zealand's currency is known was trading up about 0.5 percent against the U.S. dollar Thursday at 85 cents.

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