Chinese credit rating agency Dagong has downgraded the rating outlook of New Zealand to negative, warning that increasing interest rates will curb economic growth and slow down the pace of achieving fiscal balance.

"The growing domestic market expectation for an interest rate hike will curb the economic growth, which is expected to face slowdown pressure. While... the overheating domestic real estate sector... will lead to the rise of both domestic and external interest rates, which will restrain private consumption and investment," Dagong said in a statement.

Local economists are predicting an increase in the Official Cash Rate of 125 basis points to 3.75 per cent by the end of the year - which could mean that banks lift their floating interest rates to about 7 per cent.

Dagong said the tightening of New Zealand's monetary policy will put pressure on the banking industry's assets quality and liquidity.


"In recent years, the low-cost domestic and foreign capital elevated the price of domestic real estate and generated credit bubbles. In addition, the rising cost of external financing will exacerbate the debt burden and liquidity pressure of the banking system."

The government will also face increased fiscal balance pressure in the short term, despite the Key-led government's continued fiscal consolidation policy, the Dagong report claims the goal of achieving a fiscal surplus in 2014/2015 will become difficult with a slowdown of economic growth.

"The economic growth rates of 2014 and 2015 are expected to slow down to 2.3 per cent and 1.6 per cent respectively. In the long term, the potential economic growth will fall since the high level of private sector debt is still accumulating," Dagong said.

Dagong has maintained the local and foreign currency sovereign credit ratings at AA+ and AA respectively based on the post-disaster reconstruction and strength in the dairy sector.

Dagong is regarded as one of the few notable non-US based credit rating agencies, but some have described Dagong's ratings as being hardly followed outside of China.