AUCKLAND: The head of New Zealand's central bank said on Tuesday that monetary policy would look through a temporary spike in energy costs from the conflict in the Middle East but higher rates could be needed if inflation threatened to become entrenched.
Reserve Bank of New Zealand Governor Anna Breman told a media event in Auckland that policymakers expect higher oil prices to push up inflation and would respond if the pressures spread more broadly through the economy.
"We don't want to react too soon to inflationary pressures that we can do little about, but we don't want to wait too long in case we see those inflationary pressures becoming more long lasting," she said.
"I will not rule out either rate hikes or rate cuts because of the uncertainty in the global environment," Breman, who took over as governor late last year, added.
After cutting rates aggressively over the past two years, the central bank has held them at 2.25% since November.
However, fourth-quarter inflation of 3.1% breached the central bank's target band of 1%-3%, and with energy prices rising, markets are increasingly pricing in a near-term policy tightening.
Markets see little chance of a hike on April 8 but imply a roughly 60% chance of a 25-basis-point move in May, with rates seen ending the year at 3.0%. Several banks have already started lifting mortgage rates.
Breman said tighter financial conditions could slow the economy in the near term, a risk the monetary policy committee is watching.
In a speech published online also on Tuesday, Breman said the duration of any energy shock was important in balancing the risks of higher inflation against the drag on economic growth.
"A short-lived disruption and a temporary increase in petrol prices can - and should - be looked through from a monetary policy perspective if it is unlikely to have an impact on medium-term inflation outcomes," said Breman.
She added that households and businesses face uncertainty and potential hardship from higher energy costs, and that targeted fiscal support would be more effective than monetary policy in supporting the economy.
"Most importantly, monetary policy can and should ensure that a temporary inflation spike does not turn into enduring inflationary pressures," she said. "The committee will be vigilant to this risk."
The speech was seen as somewhat dovish by economists, with the governor emphasizing waiting and seeing how the situation plays out before responding.
"It’s unlikely the RBNZ will be raising rates in the next 6 months," said Westpac Chief Economist Kelly Eckhold and Darren Gibbs in a note.
"It’s going to take time to work out how long this shock lasts, the impact on the economy and excess capacity and the implications for medium-term inflation pressures. OCR (official cash rate) cuts similarly look unlikely while this assessment is being made."
(Reporting by Lucy Craymer, Wayne Cole and Renju Jose; Editing by Mark Porter, Chris Reese and Shri Navaratnam)
