MNI RBNZ WATCH: MPC Discussed Front-Loading Hikes

The Reserve Bank of New Zealand’s Monetary Policy Committee debated whether to frontload any future hiking cycle in order to contain energy-price-driven inflation before unanimously voting to hold the official cash rate at 2.25% on Wednesday in line with expectations, Governor Anna Breman told reporters.

The MPC stands ready to act decisively to ensure medium-term inflation remains close to the 2% target, Breman said. Expectations for rate increases later this year firmed after the press conference. 

“We discussed the possibility of whether a relatively early rate hike could mean we needed to do fewer rate hikes if we saw risk to medium-term inflation being higher, but there was definitely no discussion or strong advocates for hiking at today's meeting," Breman said, adding that the Bank will update its full forecast set at the May meeting.

"We also discussed the risk that that could dampen the weak economic growth that we're already seeing. So when we say that we balance these things, that is what we mean,” she said. “We’re looking at whether headline inflation is spilling over into core inflation ... at the medium- and long-term inflation expectations, and we're looking at wage growth, because we know that they tend to be a good predictor of a medium-term inflation.” (See MNI RBNZ WATCH: MPC To Hold, Eye Iran Impacts)

Overnight index swaps rose 5-12 basis points across meetings, with around 9bp of tightening priced for May and the policy rate seen at about 2.85% by December.

MIDDLE EAST CONFLICT

Breman said the Bank is closely monitoring how the Iran conflict feeds through to the economy, particularly via higher energy prices and potential second-round inflation effects. Business survey evidence is mixed, she said, with some firms planning price increases or temporary fuel surcharges, while others report limited pricing power due to weak demand.

Higher oil prices and supply disruptions are expected to lift near-term inflation. The Bank now forecasts CPI at 3.0% in Q1 and 4.2% in Q2, though Breman stressed the outlook is highly uncertain.

The projections assumed oil prices based on recent futures, with some pass-through to transport costs, airfares and, to a lesser extent, food prices. However, volatility in oil markets means inflation could be either higher or lower than forecast. "As we've seen today, oil prices fell quicker than the futures market price. If that persists, [Q2's 4.2%] is on the higher side. On the other hand, if oil prices rebound and go up to a higher level again, then it's on the low side."

The Bank would look through near-term volatility and focus on returning inflation to the 2% midpoint over the medium term, she added. This will depend on core inflation remaining contained, modest wage growth, and stable inflation expectations.

GROWTH OUTLOOK

The New Zealand economy was in the early stages of recovery prior to the conflict, with GDP rising 0.2% in Q4. More recent indicators suggested momentum was building, but higher fuel costs and uncertainty are now expected to weigh on growth.

Breman noted spare capacity is likely to persist for longer, limiting firms’ ability to pass on costs and dampening medium-term inflation pressures. Elevated unemployment and job insecurity are also expected to restrain wage growth.