Official interest rate cuts seem less likely after surprisingly strong economic growth in the March quarter, but the Reserve Bank is still expected to keep rates on hold until March next year.
The economy grew an unexpectedly strong 1.1 per cent in the first three months of the year, mainly as a result of a big boost from food manufacturing, giving the kiwi an instant boost.
The Reserve Bank recently said it expected growth of just 0.4 per cent in the March quarter, and bank economist forecasts ranged from an average of just 0.4 per cent to a top pick of 0.7 per cent.
Financial markets have now all but priced out any chance of a rate cut.
But TD Securities strategist Alvin Pontoh said the strong growth figures were not a "game changer" for the central bank, that would spark a tougher approach. But they would reinforce the Reserve Bank's "wait and see" approach.
"Given frequent revisions to the data and heightened global uncertainty, it's unlikely to prompt a more hawkish stance by the RBNZ," Pontoh said.
ASB Bank said it still expected the RBNZ to remain on hold until March 2013.
"Some of the risks of a later start than that have reduced, but Europe will remain the dominant influence on when the OCR goes up - and whether it actually goes down in coming months," ASB said.
It was still possible that interest rates could be cut if the debt crisis in Europe got much worse, ASB said.
"The outlook remains very murky with Europe a chronic source of risk, and even without that risk we would view New Zealand's recovery as only a gradual one," ASB economist Christina Leung said.
Most recent consensus forecasts from a large group of economists suggested average growth of 1.2 per cent for the March year, with the recovery expected to be lower and longer-lasting than earlier expected.
Economic activity for the year to March 31 was 1.7 per cent, Statistics NZ said, with revisions to earlier data showing that the economy was more robust last year than previous figures suggested. Growth was revised up to 0.4 per cent for each of the three previous quarters.
The New Zealand dollar immediately jumped half a US cent to back above US80c on the news of the higher-than-forecast growth. An indicator for borrowing costs, 2-year swap rates, rose 12 basis points on the news.
For this year's March quarter, continued good grass growing conditions on farms was a major factor in boosting growth, reflected by higher milk production in agriculture and better dairy and meat manufacturing figures, Statistics NZ said.
There was growth across a number of industries, a change from last year's more mixed picture which saw some sectors improving while others fell back.
The Statistics NZ figures showed manufacturing was up 1.8 per cent in the March quarter, the biggest contributor to growth.
Food, drink and tobacco manufacturing was up 3.2 per cent, with rises in both meat and dairy product manufacturing. Metal product manufacturing also rose more than 6 per cent.
Business services rose 2 per cent, while agriculture was up 2.3 per cent, due to higher milk production from farms. Wholesale trade activity was up 1.2 per cent.
Statistics NZ figures also showed household consumption spending was up 0.1 per cent in the March quarter, the same as the increase in the December quarter.
Westpac economists had expected to see household spending fall in the wake of the Rugby World Cup.
"But it looks as if this was driven by a massive 16 per cent rise in overseas spending by Kiwis, with an offsetting jump in imports of services, " Westpac said.
May revisions to the figures showed the economy grew just 1.1 per cent in calendar 2011, lowered from earlier reports showing growth of 1.4 per cent.
Finance Minister Bill English said the figures showed a moderate underlying strength in the economy but fluctuations were likely from quarter to quarter.
"What's important for the Government is taking a long-term view of building New Zealand's competitiveness and productivity, which will help us deal with headwinds from the uncertain global environment."
GDP growth in the March quarter was reasonably broad-based but future fluctuation were likely to occur as households and businesses got used to saving rather than consuming and debt, he said.
Last week the Reserve Bank held official interest rates steady at 2.5 per cent, with economists picking the next move up would be in March or June next year.
- © Fairfax NZ News
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