Westpac is forecasting the cash rate to increase by almost 3 percentage points
by the end of 2016.
The New Zealand economy is rumbling along at a decent clip. GDP grew 2.7 per cent over 2013 despite a severe drought early in the year. All indications are that without such a disruption this year, growth will accelerate further to about 4 per cent.
And it's not just economists
who think prospects are improving. Business and consumers are more optimistic about the economic outlook than they have been in years, if not decades.
The Canterbury rebuild remains a key driver of growth but it is by no means the only one. A lift in construction activity in Auckland, freer consumer spending following the recent period of strong house price growth and, most notably for the rural sector, a four-decade high in the terms of trade, are all playing important roles.
Unsurprisingly, strong export commodity prices and favourable climatic conditions in many (though not all) regions is boosting incomes and confidence in the rural sector. Rural land prices have been tracking higher and turnover has risen. In the latest Westpac McDermott Miller consumer confidence survey, while rural households reported that their financial situation continues to steadily improve, they have become less willing to spend a windfall or to buy major household items.
With activity increasing strongly and firms optimistic about the future, they have become more willing to hire new workers, businesses and invest in new equipment. And they are starting to have price increases in their sights. Surveyed measures of pricing intentions have notably picked up, adding to inflation pressure in the economy. The Reserve Bank expects inflation to hit its 2 per cent target by the middle of this year.
