Widespread flooding that inundated large parts of the North Island, mainly Auckland, will weaken New Zealand's economic growth and add to already spiralling inflation, economists say.
GDP growth will likely be "diminished" by the flooding and will also add about 0.4 percentage points to inflation in the March quarter, Treasury said in its latest fortnightly economic update.
"The biggest economic costs will take the form of lost capital and lost economic opportunity," Treasury said.
It's another worrying scenario facing the economy, with the Government already under pressure to solve an ongoing cost of living crisis.
"The issue is there will be a massive clean up and a massive rebuild," Kiwibank chief economist Jarrod Kerr told Newshub.
"What it means for inflation is going to be interesting - it'll depend on how well we can manage our way through this and the problem economists like myself are raising is that the construction industry is already running at full capacity."
Adding to that headache was a shortage of skilled labour, with the unemployment rate running at a near-record low 3.4 percent.
"They're screaming out for Labour," Kerr said of the building industry.
"I worry that we may find ourselves with some material shortages as well, and that's quite inflationary."
Will floods pressure interest rates?
New Zealand's annual inflation was 7.2 percent in December and the flooding will see that high rate stick around, Westpac said in a report released this week.
"We are also likely to see food price inflation hold up for longer," said the bank's weekly economic commentary.
"Vegetable growers were already contending with poor growing conditions that saw prices rise by 23 percent over 2022 and this year's flooding has caused major damage to some crops in the Auckland region."
Given the economic fallout from COVID-19 and the Russia-Ukraine war, the Reserve Bank (RBNZ) has already been forced to aggressively push up interest rates by 400 basis points since October 2021.
But some analysts believe the RBNZ would - and should - look past the initial inflationary impact of the floods.
"They should look through this shock and any inflationary pressure that we get from it," Kerr said.
"From my perspective, there's enough disinflationary forces elsewhere that we're still on a path to more stable prices."
Analysts this month have lowered their interest rate forecasts, with many now predicting a 50 basis point hike at the RBNZ's next meeting instead of 75.
And once the economy, which Treasury predicts will contract 0.8 percent over the first three quarters of this year, shows signs of regaining traction, the RBNZ will no doubt start to loosen policy.
"I do think inflation pressure, even locally, is heading in the right direction this year," Kerr said.
"[The RBNZ] will deliver, I think, a reduced rate hike. I personally think they only need to deliver 25 [basis points] but I think they will deliver 50.
"Regardless of the floods, we were already seeing households hit hard by the rapid rise in interest rates that's starting to bite."
That presents the RBNZ with the question of how high it takes the official cash rate. Originally predicted to peak at about 5.5 percent, many banks have also revised that figure down to 5 percent.
"The main point is, where does policy go from there? And I think they'll be on hold for quite some time," Kerr said. "[The RBNZ] will want to see inflation in their rearview mirror and then, from there, I think they'll actually find themselves in a position where they can take their foot off the brake.
"I think we could see rate cuts by the end of this year - definitely into 2024."
