Higher inflation caused by the Ukraine-Russia conflict could mean a faster rise in interest rates. Photo / AP
Higher inflation caused by the Ukraine-Russia conflict could mean a faster rise in interest rates. Photo / AP
New Zealand won't suffer significant direct fallout from global sanctions being imposed on Russia as our trade exposure to the region is limited, says Westpac senior economist Satish Ranchhod.
But the risk of the conflict causing inflation to run hotter than already forecast was very real, he said.
In 2021,Russia took only 0.4 per cent of our exports and Ukraine took just 0.03 per cent.
Much of the trade was related to the export dairy products which could be directed to other markets if it came to that, Ranchhod said.
But New Zealand was likely to suffer indirect effects with higher oil and food prices likely to create more inflationary pressure.
"We're already forecasting that New Zealand consumer price inflation will hit a three-decade high of 6.3 per cent in the March quarter," Ranchhod said.
"If oil prices continue to rise, inflation could reach an even higher peak, and could remain above the RBNZ's target range for longer."
The conflict could also put upward pressure on world food prices.
Ukraine was an important exporter of grains, and the conflict is adding to the upward pressure on feed prices.
The war was also putting upward pressure on energy prices - although this was currently related to market disruption in the oil and gas exporting region.
"The sanctions imposed over the past week have not targeted energy markets, in order to limit the upwards pressure on prices," Ranchhod said.
Russia controls around 8 per cent of global oil production, including 25 per cent of the European market.
"Restricting Russian supply into energy markets where inventory levels are already low would put enormous upward pressure on crude prices."
Even in the absence of sanctions, higher levels of international oil prices were already causing pain at the pumps.
"Prices for 91 octane petrol are now running around $2.70 a litre. That's up 12 per cent since the start of this year and is siphoning a large amount out of many New Zealanders' wallets."
Speaking to the Herald on Friday, RBNZ deputy governor Christian Hawkesby said the effect of the Ukraine conflict on oil prices would be an issue for the bank to focus on.
"A spike in oil prices will undoubtedly have an impact on near-term measures of inflation," he said.
But, while prices had risen since inflation forecasts were made for the February Monetary Policy Statement, it was the RBNZ's job to look through short-term volatility and assess the medium-term outlook, he said.
"I think a lot of the geopolitical tension had been priced into markets already, oil prices had risen significantly," Hawkesby said.
"Equity markets had been weaker, global bond yields had been a bit lower, the US dollar a bit stronger and that's all that sort of a flight-to-safety type environment."
Since the outbreak of the conflict there had been a continuation of that trend, he said.
But there were still a number of possible scenarios in the medium term - including oil prices stabilising or falling again.
"The key thing for us is expectations for goods and services more generally, and if the rise in oil prices and the rise in headline inflation starts to spill over into people expecting that there's more and more to come, then that's something that we would certainly have to lean against."
Reserve Bank deputy governor Christian Hawkesby. Photo / Supplied
Despite the relatively low level of exports to the region, Kiwi businesses might still see some indirect impact on their supply chains, said Paul Gestro, International Trade Consultant at ASB.
"On the imports side, one particular concern for New Zealand is around fertiliser products for our primary industries," he said.
"New Zealand is a major user of ammonium nitrate – a key component of fertiliser. Russia provides 60 per cent of the global supply."
Potassium, which was another principal import from Russia, was also used extensively in rural industry here.
"With payments to and from Russia now covered by sanctions, any businesses needing to transact with Russian entities will need to talk with their bank about their individual circumstances," he said.
Moves to block Russian banks from the global Swift payment system, would create further headaches for industry.
And currency markets would also go through a period of flux so any businesses holding foreign currency or Russian rubles are also recommended to talk with their bank, Gestro said.
"We may need to monitor other supply chain impacts such as additional constriction on global shipping and logistics. Many supplies will be cut off, so every trader will be trying to sell and buy elsewhere," he said.
"This has the potential to become be a huge headache to reschedule and reassign freight around the world."
