WELLINGTON - New Zealand entered a recession in the first quarter as the economy contracted, according to recent data, which could have implications for the country's upcoming elections and reduce the likelihood of further interest rate hikes by the central bank.

The gross domestic product (GDP) for the March quarter declined by 0.1%, in line with analysts' expectations but significantly lower than the Reserve Bank of New Zealand's forecast of 0.3% growth. Additionally, the fourth-quarter GDP figures were revised to a contraction of 0.7% from a previously reported decline of 0.6%.

Following the release of the data, the New Zealand dollar declined by 0.2% to $0.6197. The market reaction was in line with expectations as the figures confirmed the central bank's stance that there would be no further need for interest rate hikes.

The economic weakness in New Zealand was widespread, with output from half of the country's industries experiencing contraction, as indicated by Statistics New Zealand. The decline in growth can be attributed to the impact of two major cyclones and flash floods in Auckland during January and February.

Senior economist Michael Gordon from Westpac commented that it is evident that the New Zealand economy is losing momentum. The key question now is whether the slowdown is sufficient to steer the country towards a path of low and stable inflation.

Despite the technical recession in New Zealand, the country's strong employment situation has mitigated the impact on many individuals. However, the recession has become a significant political concern ahead of the October election, particularly as voters grapple with rising living costs.

Inflation in New Zealand is currently at 6.7%, well above the central bank's target range of 1% to 3%. Economists believe that signs of economic slowdown will be welcomed by the central bank, which has pursued an aggressive policy tightening approach to address inflation, marking the most substantial tightening since the introduction of the cash rate in 1999.

The cash rate in New Zealand currently stands at its highest level in 14 years, reaching 5.5%. It has increased by 525 basis points since October 2021, and the central bank indicated in its previous meeting in May that the cash rate has now reached its peak.

According to Abhijit Surya, an economist at Capital Economics, as the demand-side factors contributing to inflation gradually subside, the argument for implementing rate cuts will become more persuasive.