Arid conditions across the country that have led to a drought being declared in several North Island regions and kicked off early livestock slaughter threatens to derail agricultural production down the line, according to the Reserve Bank.
The dry conditions are weighing on the primary sector, and are expected to lead to weaker milk production in the latter half of the dairy season, the central bank says in its March monetary policy statement.
Because of that, animal slaughter is expected to increase in the first half of 2013, which will have "negative implications for production further out," it says.
"If dry conditions persist or intensify they could substantially reduce economic output more generally."
An official drought was declared across much of the North Island last week and low hydro lake levels have prompted the Bluff aluminium smelter to pare back production.
In his statement, RBNZ governor Graeme Wheeler says the "worsening drought conditions are creating difficulty in much of the country", though the full MPS report held little detail about the potential impact of the drought.
The central bank says the fourth quarter of 2012 showed stronger growth than expected and it doubled its forecast for gross domestic product to 0.8 percent in that period, while trimming 0.1 of a percentage point from the March and June quarters of 2013 to 0.6 percent and 0.7 percent respectively.
Deutsche Bank chief economist Darren Gibbs expected the Reserve Bank's forecasts to "make some allowance for lost production to date and note the possibility of further downward revisions if satisfactory rain does not arrive soon", he said in a note before the release.
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