By Lucy Craymer

WELLINGTON (Reuters) – New Zealand food prices surged in March as flash floods and a cyclone this year jacked up fruit and vegetable prices, with economists expecting first quarter inflation data due later this week to keep the central bank on its policy tightening path.

The Reserve Bank of New Zealand (RBNZ) caught markets off guard earlier this month by hiking the official cash rate by 50 basis points to 5.25% in an effort to rein in inflation expectations.

Statistics New Zealand said on Monday food prices rose 12.1% in March year-on-year, the biggest annual increase in more than 30 years, though economists from the nation’s largest banks had expected an even stronger price surge.

Markets are focussed on first quarter inflation data due on Thursday for more clues on the RBNZ’s policy path. Expectations are that the central bank will raise rates again by 25 basis points as overall price pressures remain strong, a Reuters poll showed.

The jump in food inflation last month was driven by increased egg prices due to the banning of battery cages for hens and rises in vegetable prices after crops were destroyed by flash floods in Auckland in January and Cyclone Gabrielle damage across the North Island in February.

“With Cyclone Gabrielle devastating areas dubbed the fruit bowl of NZ, it’s no surprise to see a chunky double digit increase in fruit and vegetable prices,” said Kiwibank economists in a note.

It said it expects inflation to trend downward this year and that the cyclone had prevented a more convincing slowdown in the first quarter.

The RBNZ has hiked rates by 500 bps since October 2021, undertaking its most aggressive tightening streak since the OCR was introduced in 1999.

In its policy statement following this month’s 50 bps hike, the central bank said recent weather events had had a bigger inflationary impact than previous forecasts had predicted. In February, it forecast annual inflation of 7.3% in the first quarter.

Westpac Bank expects inflation to come in at 7.1% but still predict a 25 bps hike by the RBNZ in May. Satish Ranchhod, a senior economist at Westpac Bank, said that even if inflation does come in line with Westpac’s call it still leaves a picture of “strong and widespread price pressures.”

(Reporting by Lucy Craymer; Editing by Shri Navaratnam)

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