Strong New Zealand growth points to March rates hikes

Strongest figures in nearly four years, on the back of an agricultural rebound, may see the central bank tighten the cycle as early as March

PUBLISHED : Friday, 20 December, 2013, 1:31am
UPDATED : Friday, 20 December, 2013, 1:31am

New Zealand's economy grew at its fastest clip in nearly four years in the third quarter as its agricultural sector bounced back from drought, putting it on track to become the first developed country to raise rates as early as March.

On a seasonally adjusted basis, gross domestic product rose 1.4 per cent on the quarter, its best reading since the December 2009 quarter, Statistics New Zealand data showed yesterday.

The result blew past economists' and the Reserve Bank of New Zealand's forecasts for growth of 1.1 per cent.

From a year earlier, the US$175 billion economy grew a bigger-than-expected 3.5 per cent in the three months to September, its most since the September 2007 quarter, making the small nation one of the fastest-growing developed economies of the year.

The prospect of continuing strong growth through next year and rising inflation pressures are expected to prompt the central bank to start rate increases early next year, which will see New Zealand become the first major developed economy to tighten in the current cycle.

"With the demand picture assured, the question is rapidly becoming how much capacity the economy has to meet this demand without generating inflation," said ANZ senior economist Mark Smith. "Our core view is that a strengthening demand backdrop will underpin a rising trajectory for core inflation, with the RBNZ expected to lift the [official cash rate] from March next year."

The shift in fortunes for New Zealand has not happened overnight. A recession soon after the global financial crisis in 2008, two devastating earthquakes in the country's second-biggest city of Christchurch in 2010-11 and a severe drought this year put the brakes on the economy.

All the same, the country has come through better than most major economies, thanks in part to a robust financial system that avoided the kind of massive de-leveraging seen in the West.

Strong demand for its agricultural commodity exports, particularly from China, a growing construction sector driven by earthquake rebuilding projects and rising consumer spending on the back of increasing migration have also steered the economy into safe waters.

All of this uptick in activity has stirred consumer prices.

Inflation was 1.4 per cent in the year to September and is expected to rise further in the year ahead. The RBNZ has said it wants to anchor it at about 2 per cent - the middle of its 1 to 3 per cent target band.

Most economists in the latest poll expect the RBNZ to raise its official cash rate by 25 basis points from a record-low 2.5 per cent in March, bolstering the country's yield advantage and further underpinning the high-flying New Zealand dollar.

While the Federal Reserve in the United States announced yesterday that it would cut back its monetary stimulus starting in January, it remains a long way off from raising rates, meaning the RBNZ will be first off the blocks among major central banks to apply the monetary policy brakes next year.

The New Zealand dollar rose about a third of a cent to 82.48 US cents after the data, but it remained on the back foot, given broad strength in the US dollar after the Fed's announcement.