WELLINGTON (Reuters) - New Zealand's economy grew faster than forecast in the fourth quarter, dragging the economy out of recession, but the improvement is not expected to change the central bank's planned official cash rate cuts.

Government data released on Thursday showed gross domestic product rose 0.7% in the December quarter from the prior quarter, better than analysts' expectations of a 0.4% increase and the central bank's forecast of 0.3%. The growth followed a revised 1.1% contraction in the third quarter.

Annual GDP decreased 1.1%, Statistics New Zealand data showed. The market had expected a fall of 1.4%. Market reaction to the GDP data was muted, with the New Zealand dollar rising to $0.5821 from $0.5811 ahead of the release.

New Zealand's central bank has cut the official cash rate by 175 basis points since August 2024 to 3.75% and in February foreshadowed two further 25-basis-point cuts in April and May, with a possibility of a third cut later in the year.

Michael Gordon, senior economist at Westpac, said in a note that he believed these GDP figures favoured the view that the central bank is more likely to cut the rate just twice more.

The improvement in growth will provide some welcome relief to policymakers keen to put the economy back on a solid footing after it sank into a technical recession in the September quarter. The two-quarter GDP decline was the worst outside of the pandemic since the sharp downturn of 1991.

Statistics New Zealand said 11 of the 16 industries increased in the fourth quarter. The largest rises were from rental, hiring and real estate services, retail trade and accommodation and healthcare and social assistance. It added that higher spending by international visitors had also boosted tourism-related industries.

Jarrod Kerr, chief economist at Kiwibank, said while this was the first step in the economy's recovery and green shoots had emerged, there were still pockets of significant weakness such as construction. New Zealand also faces external headwinds. Risks to growth this year have risen as U.S. President Donald Trump's policies, led by ramped-up tariffs against major trading partners, have raised fears about a broader economic downturn globally. That could impact New Zealand as it exports heavily to both China and the United States.

Kerr added if the downside risks to global outlook persisted, then "a move to a cash rate below 3% may be needed to get us back on track." The U.S. Federal Reserve on Wednesday held rates steady and is expected to go slow on cuts this year due to potential inflationary effect of Trump's economic policies, which could complicate the Reserve Bank of New Zealand monetary policy task.

(Reporting by Lucy Craymer; Editing by Alasdair Pal and Jamie Freed)