IMF tips NZ economic growth of 3.5pc this year

The main domestic risk is house prices overshooting followed by a sharp fall. Photo / APN

The International Monetary Fund expects the New Zealand economy to grow 3.5 per cent this year before easing back to a 2.5 per cent pace by 2016, in line with its average since the start of the century.

The economic expansion is becoming increasingly embedded and broad-based, it says, driven by supportive financial conditions, high commodity prices, resurgent construction activity and a substantial increase in net immigration.

The IMF supports moves by the Reserve Bank to tighten monetary policy and by the Government to return to a fiscal surplus.

But though it sees New Zealand banks as well capitalised and sound, it points to their reliance on offshore borrowing as a continuing source of risk over the medium term.

An orderly exit from the quantitative easing undertaken by larger advanced economies would likely benefit New Zealand by bringing the exchange rate down.

"However, a bumpy exit from unconventional monetary policies and bouts of market volatility would likely raise the cost of New Zealand banks' offshore wholesale borrowing," the IMF said.

It puts the chances of that at 30 per cent or more.

Other potential external risks are a sharp slowdown in China and a sustained decline in commodity prices. In both cases the flexible exchange rate would help buffer the impact.

The main domestic risk is house prices overshooting followed by a sharp fall.

The risks are closely linked, the IMF says.

But relatively low government debt and interest rates well above the zero bound meant the authorities had "policy space" to respond to shocks, it said.