The Reserve Bank will look through the current food and fuel price shocks and keep the Official Cash Rate on hold into 2014, the New Zealand Institute of Economic Research (NZIER) says.
Releasing the NZIER's latest Quarterly Predictions, principal economist Shamubeel Eaqub said domestic growth was steady but unspectacular as Kiwi households and the government spent cautiously and paid off debt.
"This is an essential part of the adjustment from the pre-Global Financial Crisis, credit-fuelled boom of the early 2000s but is making for a tough time for retailers and builders. A tentative lift in mortgage borrowing is promising, although business investment is still muted for this stage in the recovery," Eaqub said.
Global slowdown key risk for New Zealand
The biggest risk to the outlook for New Zealand was from a slowing global economy.
"The European sovereign debt crisis is spilling over to our key trading partners in Asia and Australia, which will dent our exports”, Eaqub said.
"We expect only 1.7% growth in 2012, recovering to 2.7% in 2013. We expect a gradual and patchy recovery because of uncertainties around the timing and size of the Canterbury rebuild and highly uncertain trading conditions," he said.
Price shocks could be on the way
Eaqub noted grain and crude oil prices had risen sharply in recent months. High food and fuel prices, if sustained, would hold back economic growth both in New Zealand and abroad, he said.
"A severe drought in the USA has lifted grains prices. This will also raise downstream prices like dairy and meat. While higher soft commodity prices are a boom for our farmers, consumers may face higher prices at the supermarket in early 2013," Eaqub said.
No interest increases until 2014
"Interest rates will be on hold until 2014. The economy is slow, there is little inflation and global risks are high. The RBNZ will look through current spike in global food and fuel prices, as they are transitory," he said.