The summer drought took a bite out of economic growth in the the first three months of the year, offset by the Canterbury rebuild.
The economy grew a weaker-than-expected 0.3 per cent in the March quarter according to Statistics NZ figures released today.
Westpac Bank chief economist Dominick Stephens said the result was a genuine downside surprise and leaned in the direction of later and fewer interest rate rises and a lower New Zealand dollar.
"However, the surprise was relatively small and does not alter the fundamental characteristics of the economy," he said.
"We would still describe the economy as being on a broadly accelerating trajectory, stimulated by the post-earthquake rebuild in Canterbury and rising house prices."
Westpac expected another 0.3 per cent GDP growth result in the June quarter due to ongoing drought effects.
The "modest" March quarter growth in economic activity follows a rise of 1.5 per cent in the December 2012 quarter, and some economists said the weak March quarter reflected a "payback" from the strong growth at the end of last year.
The average market forecast was for growth of 0.5 per cent in the March quarter, which was in line with Reserve Bank expectations.
ANZ Bank senior economist Mark Smith said the March quarter result was "a touch softer" than expected, with an uneven expansion driven by more construction and a boost from the census. The drought also had an impact and looked set to weigh on the June quarter.
But forward-looking indicators pointed to solid growth in the second half of the year.
He said there was no immediate need for the Reserve Bank to lift official interest rates and ANZ still expected the first rise in March next year, with a gradual lift in rates and a relatively low end point for the cash rate.
The drought showed up as expected in the weak GDP figures, with lower milk production and higher slaughter numbers for the first three months of 2013 Statistics NZ said.
"We expect the drought will impact on the economy for several quarters, as lower herd numbers and conception rates will affect future production," GDP project manager Jason Attewell said.
Economic activity for the year ended March 2013 was up 2.5 per cent.
"The Canterbury rebuild boosted activity for construction and related services," Attewell said.
"The rest of the economy was a mixed bag, but we are coming off very strong growth in the previous quarter."
Among the biggest changes were business services (up 3.9 per cent), driven by architectural and engineering services in Canterbury and Auckland. Construction was up 5.5 per cent, due to residential building and associated construction services activity in Canterbury.
Agriculture fell 4.7 per cent, due to dry weather in the quarter, which meant that dairy stock were dried off early resulting in lower milk production.
After the GDP figures were issued, the dollar dipped slightly to US78.6 cents.
Earlier today, the New Zealand dollar had dropped to US78.8c, from almost US80.5c before the United States Federal Reserve's latest announcement on a strengthening economy.
Overnight, Federal Reserve chairman Ben Bernanke ended weeks of speculation by saying the central bank would probably slow its bond-buying programme later this year and end it next year because the economy was strengthening.
The Fed's purchases of Treasury and mortgage bonds have helped keep long-term US interest rates at record lows. A pullback in its $85 billion-a-month program would be likely to mean higher rates on mortgages and other consumer and business loans.
Speaking at a news conference after a two-day Fed meeting, Bernanke said the reductions would occur in "measured steps" and that the bond purchases could end by the middle of next year. By then, he thought unemployment would be about 7 per cent.