NZ economy grows at fastest annual pace in 6 years

Auckland, New Zealand.
John Foxx | Stockbyte | Getty Images

New Zealand's economy expanded at its fastest annual rate in more than six years during the first quarter driven by a surge in construction, bolstering the case for another interest rate rise next month to curb growing price risks.

The economy grew a seasonally adjusted 3.8 percent in January-March from a year ago, Statistics New Zealand figures showed on Thursday, its best pace since the September 2007 quarter and slightly exceeding economists' forecasts for a 3.7 percent rise.

Driving the NZ$226 billion ($195.7 billion) economy at the start of the year was a 12.5 percent pick-up in construction activity, the biggest quarter rise since March 2000.

Read MoreNew Zealand may kick start race to mine the ocean floor

This helped spur a 1.0 percent expansion for the quarter, unchanged from the December quarter, but below an expected 1.2 percent rise.

The figures indicated the small South Pacific nation's economy outperforming most developed economies, and will keep pressure on the Reserve Bank of New Zealand to raise rates to 3.5 percent next month.

"They pretty much hinted if events keep on track they'll be hiking in July, and this suggests things are in track with their view, so we expect a hike in July and pause until December," said ASB Bank chief economist Nick Tuffley.

Read MoreIt may be four rate hikes in a row for New Zealand

The softened in response to the weaker-than-expected quarterly rise, easing to a low of $0.8310 from $0.8324 before the data.

New Zealand's economy has continued to pick up the pace in recent quarters thanks to the ongoing Canterbury earthquake rebuild projects. Record-high exports of dairy products, the country's biggest export earner, has also boosted terms of trade to their highest in around 40 years.

Read MoreThe messagethe economy is sending the Fed

To quell rising inflation pressure stemming from an outperforming economy, the RBNZ in March became the first developed central bank to raise interest rates in the current cycle, and is expected to raise rates gradually through late 2015.

It raised rates to a five-year high of 3.25 percent earlier this month, and 10 out of 15 economists in a Reuters poll expect the RBNZ to hike again next month, which would be its fourth tightening in as many rate reviews.

Expect RBNZ to remain hawish: Economist

Many economists predict it will hike two more times this year as growth outperforms many major economies. The RBNZ expects a strong economy will lift inflation pressures towards its 2 percent target in the coming year, after annual CPI rose 1.5 percent in the first quarter.

Broad strength in construction activity boosted the economy, with residential and non-residential building picking up in the earthquake-hit Canterbury region and other parts of the country.

Read MoreFord cutsfuel economy on 6 cars after new tests

A 6.3 percent quarterly lift in mining activity also drove growth, while activity in the agriculture industry rose 0.9 percent due to a rise in export volumes.

However, the value of dairy exports, the country's largest export product, slipped 3.3 percent on a slide in global dairy prices, after surging 20 percent in the previous quarter.

Overall, growth was tempered by a 1.5 percent slide in wholesale trade, due to decreased trade in machinery and equipment wholesaling.

Read MoreAll eyes on Brazil-is the economy ready?

While most economists believe the economy will remain strong for some time to come, some expect it has little room to grow much further, tipping annual growth to peak around 4.0 percent in the coming quarters, a touch higher than the RBNZ's forecast for 3.7 percent.

Westpac economists anticipate softer house prices will feed into lower consumer spending, which could slow the economy to around 3.2 percent in 2015.