Source: Radio New Zealand
- RBNZ governor says NZ is likely to see higher short-term inflation
- Rates could rise if there are effects on medium-term inflation or inflation expectations
- Economic growth likely to be dampened
The Reserve Bank governor is warning of higher inflation and weaker economic growth due to the Middle East crisis.
The Israel and United States-led war against Iran has sent global energy prices soaring due to the closure of the Strait of Hormuz, and attacks on key energy infrastructure in the Gulf.
Economists had already warned of the inflationary impact facing the New Zealand economy.
In speech notes published on Tuesday, Reserve Bank (RBNZ) governor Dr Anna Breman echoed that sentiment.
“We are likely to see higher headline inflation over the near term, and somewhat weaker growth momentum,” Breman said.
Annual inflation was at 3.1 percent in the December quarter, above the RBNZ’s 1-3 percent target band.
The remarks come two weeks ahead of the RBNZ’s next monetary policy decision, where the Official Cash Rate is expected to remain on hold.
“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,” Breman said.
“For this type of disruption, we would likely see higher inflation over the next few quarters, along with squeezed real incomes and demand.”
She said the peak impact of monetary policy on inflation took about six to nine quarters.
“So, tightening monetary policy in response to a short-lived disruption would only dampen growth without materially improving near-term inflation outcomes,” Breman said.
“If there are effects on medium-term inflation or inflation expectations, the appropriate policy response could be to increase interest rates to prevent these second round effects.”
Breman said “it is critical” for monetary policy to be forward-looking and focused on medium-term inflation pressures.
She said global supply chains were feeling the effects of the conflict, and it “will take time for the full effects of this shock on the global economy to play out”.
“We should try to avoid reacting too early to near-term inflation pressures that monetary policy can do little about – or reacting too late if above-target inflation becomes embedded in the economy.”
High near-term inflation, weaker growth
Breman said the higher short-term inflation spike would primarily be driven by higher petrol and diesel prices, which made up about 4 percent of the Consumer Price Index.
Higher fertiliser prices were another factor, and she believed it could take up to nine months to fully pass through to supermarket prices.
“Autumn fertiliser requirements are already on-hand in New Zealand, and fertiliser imports usually decrease over the winter months,” Dr Breman said.
“We expect fertiliser use to pick up for spring planting, which is when we may see more direct impacts on farms.”
Breman said the conflict meant New Zealand’s economic growth momentum would be “somewhat weaker” than the RBNZ’s previous assessments.
The bank’s February Monetary Policy Statement published forecasts of GDP growth of 1.1 percent in the March quarter, and 0.5 percent in the June quarter.
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand