New Zealand’s central bank warns inflation could become persistent

[SYDNEY] A top official at New Zealand’s central bank warned on Tuesday (Jul 14) that the inflationary pulse from higher oil prices risked skewing inflation expectations upward, requiring some further rise in interest rates.

Speaking to a business group, Reserve Bank of New Zealand chief economist Paul Conway said firms were under pressure to pass on higher costs stemming from the conflict in the Middle East, which could lead to inflation becoming more persistent.

“How price setting behaviour evolves from here is a key uncertainty,” said Conway. “If inflation pressures stemming from the Middle East conflict prove to be more persistent than expected, we will respond.”

The central bank’s Monetary Policy Committee last week raised its official cash rate by 25 basis points to 2.5 per cent, the first hike in three years, as it sought to reduce policy stimulus in the face of rising inflation.

“Last week, MPC noted that with inflation still above target and economic activity expected to strengthen, some further reduction in monetary stimulus is likely to be required,” Conway said on Tuesday.

The RBNZ, which last tightened policy in April 2023, has slashed rates by 325 basis points since August 2024 to support a struggling economy.

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However, the oil shock stemming from the Iran war has pushed inflation significantly beyond the central bank’s target range of 1 per cent to 3 per cent, forcing policymakers to bring forward rate hikes despite an unsteady recovery.

The RBNZ expects annual inflation to peak at 3.9 per cent in the June 2026 quarter before declining to 3.3 per cent in the September quarter and close to 2 per cent in 2027. The central bank aims to keep inflation in a range of 1 per cent to 3 per cent, with a 2 per cent main target. REUTERS