The downside risks around global growth have receded in recent months, and financial market sentiment has improved. Domestically, the economic recovery is uneven. While demand and output are expanding, the labour market remains weak. Economic growth and inflation are being shaped by a range of forces. The Canterbury rebuild is gaining momentum and residential investment and business and consumer confidence are increasing. House price inflation is increasing and the Bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply.
The overvalued New Zealand dollar is undermining profitability in export and import competing industries, and worsening drought conditions are creating difficulty in much of the country. Ongoing fiscal consolidation will also act to slow overall demand.
We project the economy to grow at an annual rate of between 2 and 3 percent over the forecast period. Inflation is expected to rise gradually towards the 2 percent midpoint of the target range.There are both upside and downside risks to this outlook. At this point we expect to keep the OCR unchanged through the end of the year.