ASB Bank economists expect the Reserve Bank to keep interest rates on hold until September 2013, before starting what they say will be a very gradual tightening cycle that will see the official cash rate peak at 4 per cent by mid-2015.

The bank's economists said their prediction was against a backdrop of ongoing global uncertainty, offset by a gradual recovery in New Zealand economic growth which was underscored by earthquake reconstruction activity and a firmer housing market.

"Ongoing global risks will need to be weighed against gradual improvement in domestic spending, in an environment where low interest rates are encouraging a recovery in borrowing demand," the bank's quarterly economic forecasts said.

The ASB has pushed its prediction of a rise in the official cash rate out to September 2013 from its previous forecast of June that year.


"While the Reserve Bank's low expectations for New Zealand trading partner growth look reasonable, we continue to expect domestic inflation pressures will be stronger in coming years than the Reserve Bank's forecasts show.

"We also remain wary about the housing market in an environment where mortgage rates are likely to remain very low well into 2013 and risk further boosting demand in a supply-constrained market, notably in Auckland," the bank said.

ASB expects ongoing strength in the housing market, coupled with gradually rising domestic inflation pressures, will push the Reserve Bank to start tightening in the closing stages of next year.

At last week's rate review, Reserve Bank Governor Graeme Wheeler left the official cash rate unchanged at 2.5 per cent, where it has sat since March 2011.

The New Zealand dollar, which traded yesterday at around US82c, remained elevated, thanks to ongoing weakness in Europe and yet more quantitative easing in the US, both of which would keep the major currencies depressed, ASB said.

New Zealand export commodity prices had recovered slightly after declining in the first half of this year and, as a consequence, ASB expected a strong New Zealand dollar over the next year.

But after 2013, the kiwi would start to depreciate as other economies regained their footing and began to unwind some of the extraordinary monetary measures resorted to since the global financial crisis.

ASB expected annual average gross domestic product to increase from 2 per cent in the June year to 2.3 per cent in the September year, then to 3.3 per cent by September 2014. Annual CPI inflation would hover near 1 per cent for much of 2013, picking up in 2014 to hit 2.6 per cent in the March 2015 year.