The Reserve Bank of New Zealand on Thursday raised its official cash rate (OCR) by 25 basis points to 3 percent, the second rise in six weeks, citing increasing inflation pressures.

Reserve Bank governor Graeme Wheeler said New Zealand's economic expansion had considerable momentum, with GDP estimated to have grown by 3.5 percent in the year to March, but he also warned the country's high exchange rate was unsustainable.

Prices for New Zealand's export commodities remained very high, though auction prices for dairy products have fallen by 20 percent in recent months, Wheeler said in a statement.

"Domestically, the extended period of low interest rates and strong growth in construction sector activity are supporting the recovery. Net immigration continues to increase, boosting housing and consumer demand. Confidence remains very high among households and businesses, and measures of investment and employment intentions are positive," he said.

"Spare capacity is being absorbed, and inflationary pressures are becoming apparent, especially in construction and other non- tradable sectors."

The high exchange rate remained a headwind to the tradables sector, and along with low import price inflation had been holding down tradables inflation, and the Reserve Bank did not believe the current level of the exchange rate is sustainable.

While restrictions on high loan-to-value ratio mortgage lending introduced in October last year had eased pressure in the housing market, and rising interest rates will have a further moderating influence, the increase in net immigration was adding to housing demand.

"Headline inflation is moderate, but inflationary pressures are increasing and are expected to continue doing so over the next two years," said Wheeler.

"In this environment it is important that inflation expectations remain contained. To achieve this it is necessary to raise interest rates towards a level at which they are no longer adding to demand," he said.

"The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures, including the extent to which the high exchange rate leads to lower inflationary pressure."

By increasing the OCR to keep future average inflation near the 2 percent mid-point of the 1-percent to 3-percent target range, the Reserve Bank was seeking to ensure that the economic expansion could be sustained.

The OCR remained at an historic low of 2.5 percent for three years before the Reserve Bank raised it by 25 basis points last month.