Higher growth and interest rates - Quarterly Predictions, March 2014 - media release
26 February 2014
New Zealand Institute of Economic Research (Inc)
Embargoed until 1am Wednesday 26 February 2014
NZIER Quarterly Predictions, March 2014
The New Zealand economy is recovering from a long and deep recession that started in 2007. After nearly seven years of economic stagnation, the recovery is now fully under way. The economy will grow by 3% in 2014.
Strong growth this year will come from the resumption of ‘normal’ spending and investment patterns and surging Canterbury reconstruction. The reconstruction will contribute one-third of GDP growth this year (Figure 1).
Detailed commentary and forecasts for the next five years are available exclusively to NZIER members.
Rising interest rates
We expect the RBNZ to raise the OCR from March 2014 from a historic low of 2.5% to 4% by March 2015. The RBNZ will watch for any wobbles in emerging market economies.
The RBNZ is raising interest rates because the economy is recovering and they are fearful of the risk to inflation, particularly in housing. But its main focus is to pre-emptively defuse the risk from an even larger Auckland housing bust later.
Higher interest rates will moderate the recovery, rather than cause a slump. Higher rates will reduce new borrowing and investment. Consumption will slow as existing borrowers pay more interest. These rate rises will be felt immediately by households as almost three-quarters of mortgage holders are on floating rates.
The general election later in 2014 will see a plethora of policy announcements from political parties, tempted by looming fiscal surpluses. Spending promises should be seen in the context of steeply climbing fiscal pressures associated with ageing, and the inevitable trade-offs that this will present. We do not expect the election to have any immediate impact on economic growth, but any large shifts in policy will shape future economic growth.
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