The economy will grow very little in the first half of this year as the main impact of the drought hits, say ASB economists.
The bank's economics research unit in its newsletter said it expects the bulk of the drought's impact to be felt in the second quarter,although the exact timing was uncertain.
Lack of rainfall would also affect electricity generation if it persists over the coming months, and would constrain pastoral exports over the next year after an initial surge in slaughter.
It expects growth to potentially average 0.2 per cent per quarter, a pace similar to a patch in 2005/06 but better than the protracted weakness of 1998.
"Weak growth doesn't necessarily imply Reserve Bank action: Despite weak growth inflation is still going to be high over the next couple of years - on economic grounds there are few reasons to be rushing to cut interest rates."
But the fragility of global credit markets remains a wildcard factor. If risk premiums rise globally, then mortgage rates too were likely to rise.
"That raises the prospect of global markets effectively delivering tighter conditions than the Reserve Bank is comfortable with. That in turn raises the potential for counteraction."
But the bank expects the official cash rate to be on hold over 2008 based on inflation concerns.
For the fourth quarter of last year, ASB expects GDP growth of 1.1 per cent and annual average growth of 3.2 per cent in production GDP when the figures are released next Friday.
It warns that although fourth quarter growth will be strong, it is likely to be temporary.
