By Candice Zachariahs March 25 (Bloomberg) -- The Australian dollar rose after yesterday’s biggest drop in seven weeks as a central bank official said benchmark borrowing costs need to climb toward “normal levels” to contain inflation. New Zealand’s currency advanced as the nation’s economy grew at the fastest pace in two years, boosting prospects for the central bank to raise interest rates from a record low. Both South Pacific nations’ currencies slid yesterday as a Fitch Ratings downgrade of Portugal’s debt renewed concern Greece’s fiscal crisis will spread to other European nations. European Union leaders meet in Brussels today to begin a two-day summit. Reserve Bank of Australia assistant governor Philip Lowe’s comments “reinforce that Australia is in a strong position economically and there continue to be inflationary price movements,” said Timothy Connors, head of foreign exchange at Custom House Global Foreign Exchange in Sydney. “We’ve seen a nice rally from the lows this morning on the back of those comments.” Australia’s currency climbed 0.3 percent to 90.98 U.S. cents as of 4:25 p.m. in Sydney after earlier falling as low as 90.66 cents, the weakest since March 9. The currency was unchanged at 83.76 yen. New Zealand’s dollar rose to 70.24 U.S. cents from yesterday in New York, when it touched 69.95 cents, the least since March 15. It bought 64.67 yen from 64.75 yen. Australian Rates Australia’s nation’s mortgage rate “is still around 50 basis points lower than the average of the last decade and a half,” Lowe said in Sydney after a speech. The RBA raised rates four times since October, when it became the first among the Group of 20 nations to increase its benchmark after the start of the financial crisis. “The important thing is the level of interest rate borrowers face not the cash rate,” Lowe said. Australia’s dollar will face so-called resistance toward 92.50 cents while New Zealand’s currency may be sold if its gains toward 70.80, Connors said. “If we see no action or consensus on Greece then risk aversion will continue to play out and we’ll see the Australian dollar lower,” he said. Benchmark interest rates are 4 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits. N.Z. Growth New Zealand’s currency rose after gross domestic product expanded 0.8 percent in the last quarter of 2009, from a 0.3 percent gain in the third quarter, according to a report from Statistics New Zealand. “It’s likely we’ll see more broad-based strength starting to come through from New Zealand,” said Stephen Roberts, a senior economist at Nomura Australia Ltd. in Sydney. “As New Zealand starts to normalize interest rates it will still be among the leading economies doing so in the developed world,” supporting its currency. Swaps traders are betting the Reserve Bank of New Zealand will increase its overnight cash rate by 179 basis points over the next 12 months, according to a Credit Suisse Group AG index. Central bank Governor Alan Bollard kept the rate at a record low on March 11 and said monetary stimulus would likely be removed around the middle of 2010 amid higher bank funding costs and a “relatively sluggish” economic recovery. ‘Better Result’ “It was a better result than the Reserve Bank of New Zealand would have been expecting,” said Paul Brennan, a senior economist at Citigroup Inc. in Sydney. “Their line in the sand was probably 0.5 percent to 0.6 percent” growth in the quarter. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates which is sensitive to interest-rate expectations, rose to 4.32 percent from 4.17 percent last week. Australian government bonds fell. The yield on 10-year notes added six basis points, or 0.06 percentage point, to 5.75 percent, according to data compiled by Bloomberg. The price of the 4.5 percent security due April 2020 slipped 0.42, or A$4.20 per A$1,000 face amount, to 90.56. To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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