As of April 8, the Reserve Bank of New Zealand’s Monetary Policy Committee agreed to hold the OCR at 2.25%.
Since the February Monetary Policy Statement, developments in the Middle East have significantly changed New Zealand’s economic outlook and the balance of risks for inflation and growth.
“In the near term, inflation is expected to increase and the economic recovery to weaken. The Committee is vigilant to any generalised inflationary pressure and stands ready to act to return inflation to its medium-term target,” the RBNZ said in its media release.
The conflict in the Middle East has disrupted global supply chains, driving sharp increases in oil and refined fuel prices. As a result, near-term inflation is rising while economic growth is slowing in many countries. Global financial markets have experienced heightened volatility, and market interest rates have climbed.
“In New Zealand, the extent of the near-term increase in headline inflation will depend on how the conflict in the Middle East evolves and the magnitude and duration of the disruption to global supply chains and energy markets.”
“Medium-term inflationary pressure will depend on the extent to which higher costs influence price- and wage-setting behaviour by firms and workers in the economy. If medium-term inflation expectations increase, then inflation is likely to become more persistent. However, weak demand and spare productive capacity in the economy should constrain the degree to which higher costs can be passed on.”
RBNZ said the Committee’s decision to keep the OCR unchanged weighs the potential benefits of acting early to curb medium-term inflation against the risk of unnecessarily slowing the economic recovery.
The Monetary Policy Committee is committed to bringing inflation back to the 2% midpoint of its target over the medium term. “This requires core inflation and wage growth to remain contained and medium- and long-term inflation expectations to remain around 2%. If these conditions are not met, decisive and timely increases in the OCR would be required.”