New Zealand Institute of Economic Research (Inc) Media release 28 February 2017 Embargoed until 1am, Wednesday 1 March 2017 NZIERQuarterly Predictions, March 2017
Many of the key themes for the domestic outlook that we outlined in our previous issue ofQuarterly Predictionshave continued into 2017. Net migration continues to set new records, boosting demand across many sectors. We continue to expect annual growth in the New Zealand economy to track over 3 percent on average over the next five years.
We expect construction and tourism will remain key drivers of growth, with activity broadening beyond Auckland. A recovery in global dairy prices is also boosting confidence in the rural regions. With businesses feeling more optimistic about demand holding up at high levels, many are planning for expansion through hiring and investment.
Against the solid momentum in the New Zealand economy are heightened geo-political risks from offshore. From the unpredictability of US President Trump’s policy actions to the ongoing political uncertainty across Europe, the shift towards protectionist and anti-establishment sentiment skews risks to the downside.
Inflation edges back into band
Annual CPI edged back into the Reserve Bank’s 1 to 3 percent inflation target band in the December 2016 quarter – the first time since September 2014 inflation is back in the target band. We expect inflation to lift over the coming years as capacity pressures broaden beyond the construction sector and retailers find it easier to raise prices.
We expect annual CPI will rise and edge close to the Reserve Bank’s inflation target mid-point of 2 percent later this year.
Interest rates to increase over the coming years
The Reserve Bank indicated it would likely keep the OCR on hold for some time. We continue to expect the Reserve Bank will keep the OCR on hold until mid-2018 before embarking on a measured tightening cycle. However, mortgage rates have already started lifting as banks pass on higher funding costs.
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