The Reserve Bank has today left the Official Cash Rate on hold at 2.25%.
But the Reserve Bank (RBNZ) monetary policy committee warned that “in the near term, inflation is expected to increase and the economic recovery to weaken”.
“The Middle East conflict has disrupted global supply chains, leading to significantly higher prices for oil and refined petroleum products,” the committee said.
The RBNZ now expects the annual Consumers Price Index (CPI) inflation to peak at 4.2% in the June 2026 quarter.
The CPI currently sits outside the RBNZ target band at 3.1% but it is expected that the data for the first quarter will show a drop to 3%.
The committee said it saw “significant uncertainties” around the forecast, and it would update it at future monetary policy meetings.
“If medium-term inflation expectations increase, then inflation is likely to become more persistent,” it said.
“However, weak demand and spare productive capacity in the economy should constrain the degree to which higher costs can be passed on.”
If the increase in near-term inflation was largely temporary, the committee envisaged gradually moving the Official Cash Rate (OCR) to more neutral levels as activity recovered and near-term inflationary pressure dissipated. The committee described the situation as being different from the supply shock in 2022, when Covid-19 and Russia’s full-scale invasion of Ukraine in 2022 disrupted supply chains and increased energy prices.
“Back then, demand was growing strongly, adding to inflation pressure,” the committee said.
However, any signs of significant second-round inflationary effects or increases in medium-term inflation expectations would require decisive and timely increases in the OCR to re-anchor inflation expectations, the committee said.
On the timing of any increase in the OCR, members discussed that “a pre-emptive response to medium-term inflation pressures could guard against the risk of inflation expectations becoming unanchored and reduce the extent of second-round price increases”.
Conversely, the committee noted the risk of reacting to higher near-term inflation and accentuating weakness in the real economy and labour market.
Members noted that this could cause unnecessary volatility in output and employment if the conflict were resolved in the near term or if the economic outlook weakened by more than currently expected.
Some members placed more emphasis on the arguments in favour of an early monetary policy response, noting that further data and analysis would provide greater clarity about medium-term inflation pressures.
Other members emphasised downside risks to growth and argued for more opportunity to judge the extent to which weaker growth balances the second-round effects of higher fuel prices.
Markets viewed the statement as being slightly more hawkish than expected, and the New Zealand dollar rallied by about a quarter of a US cent to US58.18c in response to it.
“It looks to be very slightly more hawkish than the markets would have expected,” Imre Speizer, head of New Zealand strategy at Westpac, said.
“They are talking about inflation being the bigger concern rather than growth,” he said.
Reserve Bank Governor Anna Breman will speak at a press conference at 3pm. The livestream will be available here.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
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