According to Satish Ranchhod, Senior Economist at Westpac, the New Zealand is a tow-speed economy led by the construction sector, consumer demand is well supported but challenging conditions for exports, a mixed growth outlook and weak inflation will push the Reserve Bank of New Zealand (RBNZ) to cut again rates to meet the medium-term inflation target. Key Quotes: “We are now forecasting firm GDP growth of 2.6% in 2016, accelerating to 2.9% in 2017. However, underlying this robust aggregate outlook is a ‘two-speed’ economy. Strength is expected to be underpinned by domestic demand in the main urban centres. At the same time, conditions in rural regions and for some exporters will be more challenging. So what is underpinning growth? First is a strong outlook for construction spending, particularly in Auckland. (…) Even outside of the construction sector, domestic demand has been picking up (…) In addition, New Zealand is enjoying a boom in tourism, which we expect to continue in the near term.! “Balanced against these positive factors are a number of headwinds, the most significant of which stem from offshore. Growing concern around the outlook for China and developing economies has seen increased nervousness in financial markets. Combined with only moderate global GDP growth, this signals a number of challenges for the New Zealand economy via trade, confidence, bank funding costs, weaker global commodity prices, and lower Asian exchange rates. On top of this, the outlook for agricultural export earnings has worsened.” “Headline inflation has been below the bottom of the RBNZ’s target band for over a year now. And it’s set to push even lower. In fact, it’s likely the latter half of 2016 will see annual inflation dropping to around 0%, with a very real risk it goes negative.” “With a range of domestic and offshore factors dampening prices, we don’t expect inflation will be back inside the RBNZ’s target band, let alone close to 2%, until 2017.” “We expect that the cutting cycle will resume in June. However, this will be dependent on the flow of data, and March and April are certainly live decisions. Continued downside surprises in terms of inflation, inflation expectations, or a weakening in the global economy could force the RBNZ’s hand earlier.” For more information, read our latest forex news.