Core Announcement
Reserve Bank of New Zealand (RBNZ) Chief Economist Paul Conway warned on Tuesday that persistent inflation pressures could necessitate further monetary policy tightening if businesses continue to pass higher costs on to consumers. He noted that the recent Middle East conflict has added upside risks to the inflation outlook.
Inflation Forecasts
The RBNZ’s latest forecasts now anticipate headline inflation of 3.9% in the June quarter and 3.3% in the September quarter, revised down from earlier projections of 4.2% and 4.3% respectively. These revisions follow a prior lowering of near‑term inflation forecasts after disruptions through the Strait of Hormuz eased.
Risks and Policy Implications
Conway identified the biggest risk as households and businesses beginning to expect higher inflation to persist, which could allow temporary increases in energy and petrochemical prices to become embedded in broader inflation. He stressed that keeping inflation expectations anchored is critical to avoiding a repeat of prolonged inflation episodes seen in earlier decades. If inflation stemming from the Middle East conflict proves more persistent than expected, the RBNZ would respond with additional tightening.
Business Pricing Behaviour
Research by the RBNZ shows New Zealand firms have become quicker to raise prices when costs increase and less willing to reduce prices when costs ease, especially in the services sector. Companies are also reviewing prices more frequently than in the past, making inflation pressures more responsive to changing economic conditions.
Economic Capacity
Conway said spare capacity in the economy should help limit the pass‑through of higher costs and support a gradual return of inflation to the RBNZ’s 2% midpoint over time.