Inflation subdued as New Zealand's economic recovery slows

New Zealand's economic recovery has peaked and the pace of growth is slowing, suggesting the central bank might hold interest rates for at least the next year, according to the quarterly forecast of an independent economic think-tank out Wednesday.

The economy grew strongly through the first half of this year and the growth rate was expected to hit 3.5 percent for the full year, before dipping to "a still respectable" 2.7 percent next year, according to the Quarterly Predictions of the New Zealand Institute of Economic Research (NZIER).

The Reserve Bank of New Zealand (RBNZ) had hiked the official cash rate four times this year, raising it from 2.5 percent to 3.5 percent, and the rise was biting, "as seen in falling house sales and waning confidence", while uncertain global demand also cast a shadow over the outlook, NZIER principal economist Shamubeel Eaqub said in a statement.

Spending and investment behaviour was gradually returning to normal, but without by households and businesses "gorging on debt", making the recovery more sustainable than previous recoveries, he said.

Hiring was improving, although it was unevenly distributed across different regions and industries, and retail spending was back to pre-recession levels.

"The rather lumpy and wobbly recovery, both in terms of speed and composition, means that this recovery is still elusive to many industries and regions. This in part explains why inflation is still subdued and is likely to remain so for some time," said Eaqub.

The RBNZ should hold interest rates until there was convincing evidence of strong and sustained economic growth and rising inflation to well over 2.5 percent, which was unlikely until early 2016, he said.