OCR decision: Cyclone Gabrielle cuts interest rate hike expectations

The damage to the economy as a result of Cyclone Gabrielle has caused economists to cut their expectations of a major official cash rate (OCR) hike.

Analysts largely believe the Reserve Bank (RBNZ), which delivers its OCR decision on Wednesday afternoon, will look past the inflationary impact of the disaster and deliver a softer interest rate hike than initially anticipated. 

"For now, the simple answer is to not respond one way or the other," Westpac acting chief economist Michael Gordon said in the bank's Economic Weekly report. "Monetary policy is a tool for managing the level of demand in the economy; the effects of the cyclone are more in the nature of a supply-side shock. While the disruptions will boost inflation in the near term, they are not a source of sustained price rises over the medium term, which is the relevant horizon for monetary policy."

Cyclone Gabrielle destroyed infrastructure largely across Hawke's Bay and Gisborne, has closed businesses, left homes in ruin and wiped out crops. Some communities still remain cut off.

Many economists now expect the RBNZ will raise the OCR by 50 basis points on Wednesday, despite the central bank in November signalling a 75bp rise this month. 

Westpac believes the OCR will peak at 5.25 percent.

Impacts of Cyclone Gabrielle aside, independent economist Cameron Bagrie said the RBNZ was already "a long, long way from where it needed to be" - with inflation running at 7.2 percent.

Just weeks before the cyclone, widespread flooding inundated large parts of the North Island - mainly Auckland - and economists already expected that weather event to weaken GDP and add to that inflation.

At the time, Kiwibank chief economist Jarrod Kerr told Newshub the RBNZ should look to deliver 25bp instead of 50.

"Regardless of the floods, we were already seeing households hit hard by the rapid rise in interest rates that's starting to bite."

The Government has said the cost of rebuilding after Cyclone Gabrielle could be similar to the $13.5 billion spent following the Christchurch earthquake.