The Reserve Bank holds the official cash rate unchanged at 2.25 percent
Monetary committee says Middle East conflict raises inflation, dampens growth
Focus on keeping inflation expectations in check and low inflation in medium term
RBNZ says balancing between quick action on inflation and not hurting recovery
RBNZ warns of “decisive and timely OCR increases” if necessary
The Reserve Bank (RBNZ) has held its benchmark official cash rate (OCR) unchanged at 2.25 percent, as it forecast inflation to break above 4 percent but said it did not want to hurt the economic recovery.
The decision was expected and the central bank emphasised it was looking for the likely medium-term effect of higher inflation and reduced growth caused by the war, and household and business behaviour.
“The Committee’s decision to hold the OCR balances the potential benefits of responding pre-emptively to the risk of higher medium-term inflation against the cost of unnecessarily stifling the economic recovery,” the Monetary Policy Committee (MPC) said in a statement.
It said it expected inflation at 3 percent for the first three months ended March from 3.1 percent at the end of last year, rising to 4.2 percent in the June quarter.
The MPC said economic growth would fall as a result of the war while prices have already risen.
“Higher fuel prices are increasing costs, lowering profit margins for many businesses, and reducing household purchasing power. Increased global uncertainty is also expected to weigh on investment.”
It’s all about inflation expectations
The MPC emphasised that it was taking a medium-term view to getting inflation back to the 2 percent midpoint in the target band, with the key to policy being inflation expectations.
“The extent to which these criteria are met will influence the scope for the Committee to look through current near-term inflation or whether tighter monetary policy is required.”
It said it was willing to look through a near-term inflation spike, which would allow a more gradual increase in the OCR.
“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 is vigilant to these risks.”
The monetary policy statement in February pointed to an OCR rise most likely early next year, but financial markets have priced in at least two quarter percentage point rises to 2.75 percent by the end of the year.
The finance minister said the OCR decision, and the Reserve Bank’s forecast inflation figures, were “broadly” in line with expectations.
But Nicola Willis said it was “notable” that some of the information the Monetary Policy Committee had used to base its judgements on was already out of date.
“Such is the fast-moving nature of geopolitical events,” Willis said.
“They have, like I have in my public statements, attached significant caveats to their forecasting, noting a range of scenarios are still possible. This is a challenging time for forecasters, along with everyone else in the world.”
Ceasefire adds a new element
Cotality chief property economist Kelvin Davidson said the governor’s speech last month effectively pre-empted Wednesday’s OCR decision, which came as no surprise.
“Ultimately, we’re still in wait-and-see mode on Iran, inflation, the economy, the official cash rate, and a whole lot more besides – with the news earlier in the day of a two-week ceasefire just adding to this fast-moving situation,” Davidson said.
ASB senior economist Mark Smith said the RBNZ’s assessment had a “hawkish tinge”.
“The committee is vigilant to any generalised inflationary pressure and stands ready to act decisively to return inflation to 2 percent over the medium term,” he said.
Smith said the central bank “find themselves in an unenviable position”.
“The safest course of action is to wait until more clarity emerges, which is what the RBNZ appears to have done,” he said.
ASB revised its OCR outlook, forecasting 25 basis point hikes in September and December, with the OCR reaching 3.25 percent by mid-2027.
Other factors continue to drive inflation
Economist Cameron Bagrie told Checkpoint that even if the Middle East conflict was resolved other factors would continue to drive inflation.
He said the ANZ business outlook survey indicated many businesses wanted to pass on price increases.
“Even if we get through this mess that we’ve got globally, I think there’s a simmering inflationary undercurrent there that, given the opportunity, firms are going to try to recoup lost margins when they lost margins over 2024 and 2025, so you use a bit of a shock as an excuse to push up price increases,” he said.
Bagrie said there were also other pressures such as US tariffs which meant that inflation could settle at levels higher than previous targets.
“It looks like we could be in a new normal for inflation, which is not the old normal. The old normal was two percent,” he said.
Bagrie said in terms of fuel supply, he was concerned that the government of Korea was encouraging its citizens to save fuel.
“Korea’s a big input into our supply. They supply about 47 percent of New Zealand fuel. Now, we know there’s an awful lot of stuff on the water at the moment, but that could change pretty quickly,” he said.
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