The expected damage to New Zealand’s economy from the harsh weather of the past three weeks has prompted financial markets to downgrade the outlook for interest rate hikes.
A first disaster, flash flooding in Auckland, New Zealand’s largest city, occurred on January 27. Then, from February 12 to 15, a cyclone hit the North Island, which includes Auckland.
“With the extent of the devastation gradually revealed, the market has all but eliminated the possibility that the RBNZ will proceed with the 75 basis point hike announced last November,” said Sharon Zollner, ANZ’s chief economist, in a statement. a note, referring to the Reserve Bank of New Zealand (RBNZ).
“Indeed, it now assesses a small chance of a break or just a 25bp upside next week, which is fair,” she added.
The flash floods damaged Auckland’s roads, shut down businesses including the airport, destroyed homes, roads and crops. The cyclone then damaged even more roads, many of which are still closed, swept away railway lines and grounded flights. Homes are flooded and communities cut off from the world.
Tankers cannot collect milk, some logging operations are suspended and meat processing is curtailed.
When Cyclone Gabrielle hit, picking had just started on pome fruit farms, whose production is worth around NZ$1 billion a year. Today, the industry has not only lost the product of 2023, but many orchards are still inaccessible.
Of 25 economists polled by Archyde.com from February 13-16, 20 expected the central bank to raise its benchmark rate by 50 basis points next week, even though the RBNZ’s monetary policy statement in November had suggested an increase of 75 basis points this month and an eventual high of 5.5%.
The Archyde.com poll median now puts the high at 5.25%.
No one has yet estimated the extent of the damage caused by the weather. But Finance Minister Grant Robertson told broadcaster TVNZ the cost to the government might be similar to the NZ$13.5 billion ($8.42 billion) he spent to rebuild Christchurch following an earthquake of land in 2011.
“It will be a financially significant event for the government and for individuals, households, businesses, banks and insurers,” he said.
Fifteen people are so far confirmed to have died in the two disasters.
A price spike seems likely following these disruptions. Economists expect inflation, which is already at its highest level in nearly three decades (7.2%), to rise as the country replaces homes and their contents and repairs infrastructure. Crop losses will drive up food prices.
This would normally be a reason for a central bank to raise interest rates further, but some economists expect the RBNZ to view the sudden hike as temporary.
Still, Kiwibank chief economist Jarrod Kerr said the central bank should hold off on hikes until the effect of the cyclone can be understood.
“Current circumstances warrant caution. But what we think they should do is not what they’re likely to do,” Kerr said.
After the Christchurch earthquake, the central bank cut its key rate due to concerns regarding the economy.
($1 = 1.6090 New Zealand dollars)
