25 Mar 2013

Growth raises expectation of interest rate hikes

9:30 am on 25 March 2013

An economist says better-than-expected growth will force the Reserve Bank to raise interest rates earlier and more aggressively than planned.

Figures from Statistics New Zealand released on Thursday show gross domestic product, a broad measure of the health of the economy, had its strongest quarterly rise in three years, expanding 1.5% in the three months to December, led by forestry, retail spending and construction.

On an annual basis, the economy expanded 2.5% and is now worth $209 billion - the strongest annual growth since March 2008 when the economic recession began.

Last week the Reserve Bank said interest rates would be on hold this year and its forecasts indicated the Official Cash Rate rising to about 4% in the next three years.

Westpac chief economist Dominick Stephens says he always expected the Canterbury rebuild would have a huge stimulatory effect on the economy.

He says $30 billion is a lot to put into a very small economy and that will provoke all sorts of economic activity - but only temporarily.

However, Mr Stephens says that if growth rates continue for some time, it could lead to inflation pressures requiring the Reserve Bank to lift interest rates - not necessarily earlier, but possibly higher than markets are currently pricing.

He says Westpac predicts the benchmark interest rate will rise from 2.5% to 5.5% over the course of three to four years.

Mr Stephens also says Westpac is forecasting growth of just under 1% per quarter in 2013, though the June quarter could be quite a bit less than that because of the drought.