Westpac has revised up its New Zealand growth forecast for 2014 to 4.2 per cent from its previous forecast of 3.8 per cent, based on the country's high terms of trade performance.

The bank, in its latest economic overview, said it expects the New Zealand dollar to remain above US80c against the US dollar and above A90c against the Aussie dollar until the end of 2015, also thanks to the terms of trade.

The terms of trade index, which measures changes in the price of exports relative to the cost of imports, rose by 7.5 per cent in the September quarter to a level not seen since December, 1973.

Westpac said the post-earthquake Canterbury rebuild proved a substantial boost to gross domestic product (GDP) in 2013 but the high exchange rate suppressed inflation and forced the Reserve Bank to keep interest rates low.


Low interest rates had the side-effect of provoking double-digit house price inflation, which in turn stimulated consumer spending, the bank's chief economist Dominick Stephens said.

The next phase for the economy was likely to feature a lighter mood and freer spending on the part of businesses and households, he said.

For the financial markets, Westpac expects the Reserve Bank's official cash rate to rise to 3.75 per cent by the end of the year from 2.5 per cent at present. Under those conditions, house prices can be expected to rise at a slower pace than they did last year, the bank said.

Westpac said New Zealand enjoyed the benefits of a worldwide commodities boom in 2007-8 but this time around the key drivers were starting to look more structural than cyclical.

The Canterbury rebuild and still low interest rates were likely to continue to play a major role in the level of economic activity this year, but they had probably passed their peaks in terms of the rate of growth, Stephens said.

"Instead, we expect them to share the spotlight this year with a third factor, namely, a sharp and sustained lift in national income as a result of
New Zealand's record-high terms of trade,'' he said.

The benefits to the New Zealand economy over the next year alone will be substantial, Stephens said. "If high export incomes are to become a regular feature rather than a one-off, the impact on the wider economy will be greater still,'' he said.