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Reserve Bank governor Alan Bollard says it was his toughest call raising the official cash rate by a quarter of a percent to 6.75% on Thursday.
Market reaction was immediate with the kiwi dollar leaping to a new high against the greenback of just under 74.5 cents. Money market interest rates jumped and the sharemarket fell 1.3%.
The impact has been negative for many in business but Bollard told ASB Business that the reason for the rise is that the economy is strong and continues strongly.
"We've been expecting it to come off for a while and it really hasn't happened yet...it will happen this year and that's why this was quite a tough decision...we don't want to be tightening at a time that then exacerbates the downturn.
"At the moment the signs are it's very tight, the labour market is extremely tight, business investment is strong and most of all, export commodity prices are very very healthy."
Critics say last year's rises have not yet made their way through and the latest move will exacerbate the situation when the previous rises do start hitting.
Bollard says they know there is still quite a lot in the system but they cannot wait too much longer for all the previous rate rises to flow through.
"Through last year we put the official cash rate up a number of times - only roughly half of that has gone through the mortgage rates because banks were competing very strongly.
"We still need to contract some of the activity that's there in the housing sector," says Bollard.
"We think the CPI is pushing up around the 3% mark and is likely to be up around that for a year or so - that just means we have got very limited discretion here."
Bollard says they don't want to worsen the impact of the high NZ dollar on export manufacturers by pushing the rate up but he says they don't think they're doing that.
He says he is concerned that wage claims aren't across the board in areas where they are not justified and need to be "very targeted".
And Bollard believes the housing market will slow down to stable levels by the end of the year.
