By Praveen Menon

WELLINGTON (Reuters) – New Zealand’s economy grew at a much faster pace than expected in the second quarter, officials said on Thursday, reinforcing views that the central bank will start raising interest rates despite a recent outbreak of the coronavirus.

Statistics New Zealand reported that the gross domestic product (GDP), jumped 2.8% over the three-month period ending June. This was well above the 1.3% forecast by Reuters and the 0.7% estimate of the Reserve Bank of New Zealand (RBNZ).

After a fall in unemployment to 4.0% during the second quarter, the growth rate surge was accompanied by an increase of 3.3% annual inflation above the target range of 1-3%.

New Zealand’s dollar rose 0.3% to $0.7320 after these data were released.

Mark Smith, senior economist at ASB Bank, stated that the RBNZ would “look through” near-term volatility to reduce monetary stimulation. He suggested that he expects a series 25 basis point rate (rate) increases starting next month.

After the snap COVID-19 lockdown in which the country was placed, the central bank delayed increasing rates. However, it said that a rate hike is still possible.

Markets have already predicted a 100 percent chance that the central bank will raise rates by 25 basis points at its next meeting, Oct 6.

An extremely weak base resulted in an increase of 17.4% in annual GDP. The country was under complete COVID-19 lockdown during the second quarter. According to Reuters, the expected rise was 16.3%.

The second-quarter’s growth was driven by tourism, which saw the country open a trans–Tasman travel boom with Australia.

New Zealand is now in strong recovery after a severe recession. This was mainly due to the country’s success in eliminating coronavirus from its borders and opening its economy earlier than other advanced nations.

The country was virus-free for several months before the outbreak of highly contagious Delta strain. Although Auckland, the largest city in the country is still under lockdown due to the virus outbreak of August, the rest has begun to open up. The Australian travel bubble has been temporarily suspended.

The Delta-driven lockdown is expected to cause growth to slow in the third quarter, according to economists. However, they expect a quick recovery once vaccinations are increased and the epidemic is under control.

Michael Gordon (Acting Chief Economics Officer at Westpac Bank) stated that “the possibility of another V shaped rebound becomes more probable” given the hot economy prior to August’s lockdown.

This country has now seen 13 additional cases of COVID-19 since Thursday. The total number of victims in this latest epidemic is 979.