The Reserve Bank of New Zealand has unexpectedly raised its benchmark interest rate to a record 8 per cent, lifting the Kiwi dollar to a 22-year high.

In a statement explaining the decision to raise the cash rate by 25 basis points, Alan Bollard, governor of the central bank, warned that “a sustained period of slower growth in domestic activity will be required to alleviate inflation pressures.”

He attributed the decision in part to the surge in world dairy prices, which has buoyed the country’s farming sector and could create more inflationary pressure next year.

The central bank has been gradually raising rates, but had been widely expected to leave them unchanged Thursday.

The surprise move extended the Kiwi dollar’s rally and pushed the currency as high as 75.68 US cents, its highest level since it was allowed to float freely in March 1985.

The Kiwi dollar has long been one of the main targets of the global carry trade, where investors borrow cheaply in the currencies of countries with low interest rates, such as Japan, in order to buy into high-yield currencies.

New Zealand has the second-highest interest rates among western nations after Iceland, and the widening yield differential with countries such as Japan and the US is likely to ensure that the country will continue to attract strong interest from carry trade investors.

The central bank is trying to keep inflation within a target range of 1-3 per cent. It forecast on Thursday that the country’s economy would grow 3.1 per cent in the year to March 2008, compared with 1.7 per cent in the previous year.

Although Thursday’s hike took financial markets by surprise, most analysts said they expected the central bank to refrain from further action in the near future. Joshua Williamson, senior strategist at TD Securities in Sydney, said: “With the policy rate now highly restrictive, it would be hard to argue for further tightening, especially given that leading indicators are starting to turn down.”