The Official Cash Rate has jumped to 0.50 percent - a 25 basis point rise, the Reserve Bank confirms.
It is the first rise in seven years - and the first change to the Official Cash Rate since the 75 basis point cut in March, 2020 in response to the COVID-19 pandemic.
Releasing its Monetary Policy Review on Wednesday, the central bank said in order to support maximum sustainable employment and keep inflation low (between 1 and 3 percent), it was now time to reduce the level of monetary stimulus.
Globally, economic activity continued to recover, supported by "accommodative monetary and fiscal settings" and rising vaccination rates.
"While economic uncertainty remains elevated due to the prevalent impact of COVID-19, cost pressures are becoming more persistent and some central banks have started the process of reducing monetary policy stimulus," the Reserve Bank said in a statement.
Inflation is expected to rise above 4 percent in the short-term, driven by higher oil prices, supply shortfalls and transport costs.
As noted in its August 18 Monetary Policy Statement, employment was "at or above the maximum sustainable level".
It expects higher vaccination rates to result in less disruption to New Zealand's economic activity over the coming years.
The COVID-19 Delta outbreak and resulting restrictions had affected businesses, particularly in Auckland, impacting economic activity. But before entering August level 4 lockdown, data showed the economy started from a stronger position, it said.
"The economy is expected to have contracted sharply as a result of the recent COVID-related restrictions, although by less than the first national lockdown in the second quarter of 2020," the statement said.
Likening Wednesday's decision to remove the emergency setting on the Official Cash Rate as going from "morphine support to panadol", Infometrics principal economist Brad Olsen said it was inline with expectations.
"It highlights the need to start removing some of that monetary stimulus that we built up last year," Olsen said.
Reserve Bank comments about the benefits of higher vaccination rates, and level 4 restrictions following the COVID-19 Delta outbreak having less of an impact on activity than last year's nationwide lockdown, show confidence in the current economic outlook.
"The bounce-back we're still seeing around the economy and the optimism from a number of businesses provides us still with that confidence that New Zealand's economy can weather the storm and continue to grow," Olsen said.
Fisher Funds senior portfolio manager David McLeish said Wednesday's decision showed urgency to lift the cash rate despite economic uncertainty created by the COVID-19 Delta outbreak.
Inflation pressures appeared to be more of a concern than growth, he said.
"The [Reserve Bank] is clearly focusing on the inflation side...they seem to be reacting to supply side issues - bottlenecks, transportations and typically transitory impacts," McLeish added.
The Reserve Bank said it expects to reduce the level of monetary policy stimulus over time.
That's in line with ASB and Kiwibank forecasts of a series of 25 basis point rises over coming months, Kiwibank anticipating "a series of hikes towards 1.5 percent and possibly higher".
The next cash rate announcement will be made as part of a Monetary Policy Statement on November 24.
The full Monetary Policy Review can be found here.
