Drought declared over North Island

The entire North Island has been declared as being in drought, Primary Industries Minister Nathan Guy warning yesterday parts of the South Island were also very dry.

In particular, a close watch was being kept on the Grey and Buller districts, but all regions were being monitored.

''Local groups have asked for regional declarations of drought in the past week and it has become clear that nearly all farmers in every part of the North Island are facing very difficult dry conditions.''

Extra government funding would be available to rural support trusts, which worked closely with farmers, providing support and guidance, Mr Guy said in a statement.

ANZ estimated pastoral incomes could fall by $150 million over the first half of the year and the wider impacts could reach as high as $500 million.

The bank estimated a 0.5% hit to economic growth by late 2013.

The drought declaration comes a day after Reserve Bank governor Graeme Wheeler held the official cash rate at 2.5% and said that worsening drought conditions were creating difficulty in much of the country.

Craigs Investment Partners broker Peter McIntyre said the impact of the drought on the economy and financial markets would be broad.

''With New Zealand's huge reliance on the agricultural sector, there are wide-ranging impacts on the economy and the markets from weather conditions such as these.

''While there aren't many companies in our market that are directly exposed to the agricultural sector, it remains our key export and our largest industry. The impacts are therefore wide-reach-ing.''

Most sectors and industries were likely to feel to varying degrees the effects of lower farmer incomes, reduced consumer spending, potentially higher food prices and lower economic growth.

The currency could also come under further pressure, he said.

The New Zealand dollar had been strong over recent years, which was a reflection of the economic outlook, relatively high interest rates and a strong agricultural sector.

If the drought persisted, the outlook would begin to look shaky, the prospect of interest rate cuts would increase and economic growth expectations would fall, Mr McIntyre said.

Those exporters not linked to the agricultural sector should be well-insulated from the drought and might even benefit should the currency lift further.

Companies such as Fisher and Paykel Healthcare and Delegat's - where a good harvest was expected - were in strong positions under that scenario.

Wholesale electricity prices were rising because of lower inflows, so generators such as Contact Energy should benefit if the drought conditions continued, he said.

Companies with close associations with the agricultural sector, such as the Fonterra Shareholders Fund, PGG Wrightson and Skellerup, might come under pressure in coming months.

''We may also see these sectors that are highly correlated with the economy, or linked to consumer spending, face additional challenges if conditions worsen and begin to impact GDP and consumer spending.''

That included retailers and companies such as Freightways, Mr McIntyre said.