Treasury believes a March interest hike by the Reserve Bank is "seemingly settled".
In advice to ministers released this afternoon, officials said market attention would now turn to the extent of the tightening cycle and how it affected the mortgage restrictions introduced in October.
"The latter appears to be having its intended effect of dampening demand in the housing market, but the near-term outlook for the market remains complicated by underlying factors - particularly the ongoing turnaround in net migration flows," Treasury said.
Last week, the central bank left the Official Cash Rate at its historic low of 2.5 per cent but indicated a hike was imminent. Economists are divided on whether the bank will increase rates by 25 or 50 basis points next month.
Treasury said the economy picked up pace in the second half of last year posing "near term upside risks" to its half year forecast released in December.
The economy grew by 1.4 per cent in the September quarter, boosted by agriculture's bounce back from the drought.
"It will be difficult for the agricultural sector to repeat a similar-sized boost to GDP growth in the December quarter, but all signs indicate that the economy continued to expand at an above-potential rate going into 2014," Treasury said today.
"All told, the slack in the economy that has persisted since the 2008-09 recession now looks to have largely been used up and we are nearing the start of the monetary tightening cycle."
Internationally, the United States showed recovery and there were modest gains in the euro-zone. But risks remained around developing economies with recent financial volatility prompting moves by central banks most notably in Turkey, Treasury said.
- © Fairfax NZ News