Modest Expansion Marks New Zealand’s Emergence from Recession, but Challenges Remain for Inflation Control

New Zealand’s economy saw modest expansion in the first quarter, emerging from recession with gross domestic product (GDP) up 0.2% from the previous quarter. This growth beat economists’ expectations of 0.1% and saw a 0.3% increase from the previous quarter, beating estimates of 0.2%.

Despite this positive news, the Reserve Bank of New Zealand (RBNZ) has kept its key interest rate at 5.5%, the highest since 2008, in an attempt to control inflation. While factors such as strong immigration and a recovery in tourism are supporting economic activity, high borrowing costs are constraining consumer spending and business investment.

The release of the GDP data led to a strengthening of the New Zealand dollar, trading at 61.42 US cents at 11am in Wellington, compared with 61.30 cents before the report. GDP growth of 0.2% in the quarter was in line with the RBNZ forecast, which expects growth to remain sluggish due to tight monetary policy and persistent core inflation.

RBNZ Chief Economist Paul Conway stressed the need to slow down the economy to bring inflation back within the central bank’s target range of 1-3%. While there may be some temporary difficulties along the way, Conway believes that low and stable inflation will eventually outweigh these challenges in