Westpac economists say the boost to the economy from low interest rates is now "undeniable" and has been seen most clearly in the housing market, where they expect solid price gains to continue.
And they say in their first Weekly Commentary for the year that Westpac's longstanding prediction of 7% house price growth "may come good even sooner than we expected".
The Reserve Bank moved to stimulate the economy last year by reducing the Official Cash Rate to just 1% from 1.75% at the start of the year, with the most notable shift being the 'double-cut' drop of 50 basis points in the OCR in August.
"House prices have continued to push higher, with annual house price inflation rising to 6.6% in the year to December," the Westpac economists say.
"Gains in prices have been widespread, with prices in Auckland up 4% and other regions up an average of 8.9%.
"We think continued solid gains are on the cards in the early part of 2019."
The economists say the strength in the housing market is important for two reasons:
"First, New Zealander’s hold large amounts of their wealth in owner-occupied or investment properties, and the pick-up in house prices over the past year has seen households opening up their wallets again. With house price growth set to take another step higher over the coming months, we expect that their will be related strength in household spending.
"The second reason why the pick-up in the housing market is important is that the RBNZ is likely to be more circumspect about the need for further OCR reductions.
"Economic activity has already been a little hotter than the RBNZ had been assuming. And with signs that house prices and spending are heating up, they’re likely to feel comfortable staying pat for some time yet.
"Consistent with that, we made a change to our forecasts for the Official Cash Rate late last year. We no longer expect the RBNZ will cut the OCR in February, or at any point over the first half of 2020."
Despite that, however, the Westpac economists still think that the "longer-term risks" for the OCR are to the downside and they have pencilled in an expected rate cut for August this year.
"That’s because even with an extended period of solid economic growth, inflation is struggling to reach the 2% mid-point of the RBNZ’s target band (on this front, we expect that this week’s CPI report will show that headline inflation has risen to 1.8%, but core inflation is struggling to break higher). There’s also the risk of continued softness in the global economy. We will continue to update our OCR forecasts as and when required by new information," they say.
The Westpac economists say the other big factor that will boost demand over the coming year is fiscal policy.
"Large increases in fiscal spending have been announced in previous years, and late last year the Minister of Finance announced a further $12 billion of new investment spending focused mainly on transport projects.
"With the 2020 election coming into sight, we think that further sizeable spending increases will be coming. That’s likely to include increases in transfer payments, pay rises for public sector employees, and some boost to health and education services."