Rebounding dairy prices and a growing construction sector buoyed New Zealand business confidence in the last quarter of 2016 and could point to rebounding inflation, according to a survey by an independent economic think-tank out Tuesday.
Business confidence remained high at the end of last year, with a net 26 percent of businesses expecting an improvement in economic conditions in coming month, said the New Zealand Institute of Economic Research (NZIER).
The continued recovery in global dairy prices has supported higher business confidence in the rural regions over the past year, said a statement from the NZIER.
Business confidence was strongest in the building sector, reflecting continued strong demand in construction, although architects' work suggested some softening in pipeline growth in residential, commercial and government construction.
"There has also been an easing in shortages for both skilled and unskilled labor in the building sector, likely reflecting the effects of the surge in net migration over the past year," said the statement.
"Meanwhile, solid household demand underpinned a rebound in retailer confidence, with retailers looking to invest for expansion. This is despite weakening profitability in an increasingly competitive environment."
More businesses reported capacity as a constraint, and businesses were finding it easier to raise prices, with a net 7 percent of businesses raising prices in the December quarter - a turnaround from the net 4 percent cutting prices in the previous quarter.
This pointed to a lift in inflation over the coming year, indicating the Reserve Bank of New Zealand (RBNZ) was unlikely to cut its official cash rate any further from its historic low of 1.75 percent.
"We expect the Reserve Bank will keep interest rates on hold until mid-2018, before embarking on a gradual tightening cycle," it said.
Other analysts agreed that interest rates were likely to remain unchanged. An economic note on the NZIER survey by the ASB Bank said it showed inflation indicators could be moving back up towards the RBNZ's target range of 1 percent to 3 percent.
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