WELLINGTON: New Zealand inflation may not slow as quickly as the Reserve Bank of New Zealand (RBNZ) forecasts, chief economist Paul Conway says, suggesting further interest rate increases may be in prospect.
The RBNZ last week lowered its outlook for third quarter inflation to 3.3% from 4.3%, reflecting falling fuel prices following an interim US-Iran agreement.
But oil prices have climbed again in recent days as fresh fighting erupted in the Middle East.
“I think developments in the Middle East over the last week suggest upside risks to our September quarter forecast,” Conway said in a speech in Wellington.
“If inflation pressures stemming from the Middle East conflict prove to be more persistent than expected, we will respond.”
The RBNZ hiked the official cash rate (OCR) for the first time in three years last week to 2.5%, saying it wants to remove stimulus from the economy and ensure inflation returns to the midpoint of its 1% to 3% target band by next year.
Investors are pricing that the OCR will climb to 3% by December.
Policymakers are wary that inflation will get embedded over the medium term and therefore want to return the OCR towards neutral settings.
They also expect the economy will recover in the second half of financial year 2026, which could add to price pressures.
The RBNZ’s hawkish tilt and a string of positive economic data have spurred traders to bet on two more rate hikes this year and driven up the kiwi.
Traders are also pricing in another hike in the first quarter of financial year 2027.
“Near-term inflation pressures appear to have eased, for the meantime at least, and that is clearly welcome,” Conway said.
“But the conflict has still delivered another significant inflation shock to the global and New Zealand economies.”
The RBNZ reckons there is sufficient excess productive capacity in the economy that will make it more difficult for firms to pass on cost increases.
“Spare capacity is also expected to weigh on firms’ pricing decisions, making price-setting behaviour more consistent with low and stable inflation over time,” Conway added. “Less stimulatory monetary policy will also mean less medium-term inflation pressure.”
Yet firms appear intent on trying to push ahead with price increases, a New Zealand Institute of Economic Research (NZIER) survey showed yesterday.
A net 54% of companies experienced higher costs in the three months through June and 54% expect higher costs in the third quarter, according to the Quarterly Survey of Business Opinion, which polls more than 800 firms.
A net 41% raised prices in the second quarter and 54% expect to do so in the current period.
“We do see a lift in costs and pricing indicators,” NZIER deputy chief executive Christina Leung told a briefing.
“That does suggest a lift in inflation pressures in the New Zealand economy.”
Even though oil prices have eased, the effects of the shock will continue to reverberate through the economy for some time yet, according to Conway.
“When firms can pass on higher costs more easily, inflation becomes more persistent,” he said. “And the more persistent inflation becomes, the harder monetary policy must work to bring it back to target.” — Bloomberg
