(April 8): New Zealand’s central bank held its key interest rate at the lowest level in almost four years and restated it will look through the initial inflationary impact of surging fuel prices, in a decision released just hours after the US and Iran agreed to a tentative ceasefire.
The Reserve Bank’s Monetary Policy Committee (MPC) kept the official cash rate (OCR) at 2.25% on Wednesday in Wellington, as expected by all 22 economists surveyed by Bloomberg. The benchmark is at its lowest since mid-2022.
“If the increase in near-term inflation is largely temporary, the committee envisages gradually moving the OCR to more neutral levels as activity recovers and near-term inflationary pressures dissipate,” the RBNZ 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 is vigilant to these risks.”
New Zealand’s dollar was little changed after the decision, buying 58.03 US cents at 2.20pm in Wellington.
Governor Anna Breman will hold a press conference at 3pm local time. The MPC decided by consensus to hold rates, according to the record of meeting also published on Wednesday.
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With fuel costs soaring in response to the Middle East conflict, policymakers are sensitive to price- and wage-setting behaviour that could drive so-called second round effects and unmoor inflation expectations. They are also wary that the New Zealand economy lacks momentum and so any slump in household spending or investment could stall demand and prove deflationary.
Spare capacity
“If medium-term inflation expectations increase, then inflation is likely to become more persistent,” the MPC said. “However, weak demand and spare productive capacity in the economy should constrain the degree to which higher costs can be passed on.”
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Economists at the largest local banks expect headline inflation will exceed the RBNZ’s 1-3% target throughout 2026, with some projecting it will spike to more than 4.5% by mid-year.
Inflation is likely to accelerate to 4.2% in the second quarter, the RBNZ said, adding there are “significant uncertainties” around that forecast.
“In the near term, the committee expects higher fuel prices to spill over into increased transport and food prices, reflecting the high energy intensity of these products,” the RBNZ said.
Oil prices, which have been roiled by five weeks of conflict, plunged below US$100 a barrel after the US and Iran agreed to a two-week ceasefire that’s expected to halt the American-Israeli military campaign in exchange for Tehran reopening the Strait of Hormuz.
Analysts have also downgraded their economic growth projections, with at least two tipping that gross domestic product will contract in the second quarter.
Recent discussions with businesses are consistent with a slowing in economic activity over March, the RBNZ said, without providing any projection.
The International Monetary Fund is poised to cut its global growth forecast next week, chief Kristalina Georgieva told Bloomberg on Tuesday, adding that the war in Iran has triggered a “negative supply shock” and attention to inflation ought to be a priority.
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