NZ economic growth falling to five year low

New Zealand's economic growth likely slowed in the second quarter, with the annual rate falling to its lowest level in five years, a Reuters poll of economists showed today.

The slower growth will back expectations interest rates will remain on hold.

However, any significant upside surprise could raise the risk of an increase in interest rates from the Reserve Bank of New Zealand (RBNZ), which said this month it may have to tighten monetary policy if inflation shows no signs of easing.

"The risk to interest rates seems slanted one way, with the RBNZ's reduced tolerance for upside surprises," said Doug Steel, economist at Westpac Bank.

A Reuters poll sees growth supported by gains in manufacturing, utilities and services but undermined by a fall in construction activity.

The median forecast was for seasonally adjusted growth of 0.6 per cent in the April-June quarter, slowing from a 0.7 per cent pace in the March quarter. The central bank has forecast growth in the June quarter of 0.4 per cent.

The poll sees average growth for the full year to the June quarter easing to 1.9 per cent -- its weakest pace since the year to the June quarter of 2001 -- from 2.2 per cent in the data for the March quarter.

The economy in the June quarter was expected to have grown 1.3 per cent compared with the second quarter of 2005 -- also the weakest expansion in five years -- slowing in pace from 2.0 per cent in the figures for the March quarter.

The June quarter gross domestic product data is due on Friday at 10.45am.

"On market expectations, I don't think it would be sufficient to generate a rate hike," Mr Steel said.

"But if that was to occur with a high CPI (consumer price index) or increase in inflation expectations, then it would certainly add to the weight of evidence as the bank sees it for a rate hike."

Shamubeel Eaqub, economist at Goldman Sachs JBWere, said the key figure to watch out for in the growth data would be domestic final demand.

"On my estimate at the moment, we have domestic final demand contracting in the second quarter, which means that the domestic economy is actually slowing a lot more than the headline figure suggests," he said.

Despite concerns that the economy is slowing down, the central bank held interest rates at 7.25 per cent at its latest review on September 14, but warned it may have to raise them again if data does not show inflation pressures are weakening.

Annual inflation rose to 4 per cent in the second quarter, holding above the central bank's 1-3 per cent target band for the fourth consecutive quarter.

New Zealand's interest rates are already the highest in the industrialised world.

A Reuters poll shows two of 15 forecasters expect the central bank to raise rates to 7.5 per cent next month, while the majority see rates held steady before they are cut in the second or the third quarter of 2007.

- REUTERS