The Reserve Bank (RBNZ) on Wednesday has hiked the official cash rate by 50 basis points.
That takes New Zealand's baseline interest rate to 4.75 percent, with the RBNZ having now added 450 basis points since October 2021.
A more cautious approach from the RBNZ comes in the wake of Cyclone Gabrielle, which last week destroyed infrastructure, closed businesses, left homes in ruin and wiped out crops across large parts of Hawke's Bay and Gisborne.
But the RBNZ continues to project the economy will start contracting over several quarters of this year.
"While this recession is assumed to be spread over several quarters from the middle of this year, there is considerable uncertainty about the timing," the RBNZ's monetary policy statement said. "The extent of the underlying contraction may also be masked by volatility in activity due to the recovery from the severe storms throughout the North Island."
RBNZ documents showed the central bank's monetary policy committee considered a record-equalling 0.75 percent hike but settled on 0.5.
"Cyclone Gabrielle and other recent severe weather events have had a devastating effect on the lives of many New Zealanders," the central bank said in a statement. "It is too early to accurately assess the monetary policy implications of these weather events, given that the scale of destruction and economic disruption are only now becoming evident. The timing, size and the nature of funding the Government's fiscal response are also yet to be determined."
'More challenging'
Before the announcement, analysts largely believed the RBNZ would look past the inflationary impact of Cyclone Gabrielle and deliver the softer 50 basis point interest rate hike.
"There was some speculation that the RBNZ would keep the OCR in hold for the time being," ASB chief economist Nick Tuffley said in a note. "But the impacts of weather disasters will only make the RBNZ's job of curbing inflation more challenging."
Inflation is currently running at a just below three-decade high of 7.2 percent. While economic demand was showing signs of slowing, the cyclone was expected to increase inflation and disrupt production in the near-term, the RBNZ said.
The central bank noted higher interest rates were still needed to bring inflation down and support maximum sustainable employment.
"While there are early signs of price pressure easing, core consumer price inflation remains too high, employment is still beyond its maximum sustainable level and near-term inflation expectations remain elevated," the RBNZ said.
Tuffley added ASB continued to expect a subsequent 50 basis point hike at the RBNZ's next meeting in April.
"There is the risk the RBNZ does do more over time, as its own forecasts indicate. And the RBNZ's forecasts are more consistent with three 25bp moves," Tuffley said.
House prices, which were sky-high in at the end of 2021 before the RBNZ began its tightening cycle, have now fallen by about 15 percent. The central bank now expected property prices to fall by a total of 23 percent - up from November's predictions of 20 percent.
