RBNZ will have to hike rates, Treasury

VERNON SMALL
Last updated 14:52 30/06/2014

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The economy is operating near full capacity and inflationary pressures will build through the rest of the year, forcing the Reserve Bank to lift interest rates again.

That's the assessment of Treasury officials in a report to ministers released today.

In its June update it said data during the month confirmed momentum from the second half of 2013 carried on into 2014, with the economy continuing to expand above potential growth in the March quarter.

"Indicators for domestic demand, including the ongoing surge in net migration, point to a continuation of that momentum into the June quarter and - despite some easing in consumer confidence and business sentiment indicators - solid growth is forecast throughout the rest of 2014," it said.

"With our preferred estimate of the output gap now showing that the economy is operating near full capacity, inflationary pressures will continue to build over 2014 and beyond requiring further monetary tightening by the Reserve Bank.

"This - combined with further moderation in the housing market and easing commodity prices - will temper domestic demand somewhat."

Treasury said the terms of trade reached a fresh 40-year high in the March quarter and contributed to rapid growth in nominal GDP and a narrowing in the annual current account deficit to less than 3 per cent of GDP.

"That said, dairy auction prices continued to ease in June, declining further from the record levels seen in February this year, and the terms of trade likely peaked in the March quarter."

Lower commodity prices would show up in June quarter export values, but the annual current account deficit should stay below 3 per cent of GDP midyear as earlier drought-affected quarters drop out of the annual figure.

International economic activity had picked up and activity in China had stabilised while US activity recovered after the harsh winter.

Inflation was rising in many advanced economies although most central banks remained "accommodative".

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