By Lucy Craymer and Wayne Cole
WELLINGTON, April 8 (Reuters) – New Zealand’s central bank kept its policy rate at 2.25% on Wednesday for a second meeting, buying time to assess the fallout from the Middle East war but signalling it would act decisively if inflation heats up.
In the near term, the Reserve Bank of New Zealand warned the conflict will stoke inflation and sap growth, as global policymakers recalibrate their response to an energy shock rippling through economies.
“The Committee’s decision to hold the OCR balances the potential benefits of responding pre-emptively to the risk of higher medium-term inflation against the cost of unnecessarily stifling the economic recovery,” the RBNZ said in its policy statement.
The decision was fully priced by all 32 economists in the Reuters poll.
The pause comes after an aggressive easing campaign, with the RBNZ cutting rates by 325 basis points since August 2024 as inflation cooled and economic growth faltered. That calculus is now shifting. Inflation is running at 3.1%, outside the central bank’s target range of 1% to 3% and is set to rise further as the Middle East crisis drives up fuel and transport prices.
Earlier on Wednesday, the United States, Israel and Iran agreed to a two-week ceasefire, sending oil prices sharply lower, though markets remain nervous over whether the pause in fighting can deliver lasting peace.
STANDS READY FOR ‘DECISIVE’ ACTION
The summary of the Committee meeting said members discussed how a “pre-emptive response” could head off the risk of inflation expectations becoming unanchored and curb second-round price pressures.
RBNZ Governor Anna Breman said at a press conference the bank did not come close to hiking at this meeting and lacked strong advocates for a move, though it did weigh whether tightening earlier could limit the number of increases should inflation pressures intensify.
The talk of early tightening saw bonds pare their gains, with yields on 10-year notes down 7 basis points at 4.673%, but off a low of 4.643%. The New Zealand dollar extended a post-ceasefire rally to fetch $0.5829.
“The tone of the statement was arguably more hawkish than the governor’s speech two weeks ago,” with the focus on upside inflation risks from broader price pressures tied to the Middle East conflict, said Gareth Kiernan, head of forecasting at New Zealand economic consultancy Infometrics.
He added that May is possibly too soon for the Committee to judge whether inflation pressures are intensifying, but Infometrics expects the first rate hike in July.
The central bank said it expected inflation to rise to 4.2% in the June quarter. In February it forecast that inflation had peaked in December 2025 and would ease back to the 2.0% midpoint of its target range by mid-2027.
“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,” the RBNZ said.
It said if conditions for returning inflation to the 2.0% midpoint over the medium term are not met, “decisive and timely increases in the OCR would be required.”
FRAUGHT BACKDROP RAISES POLICY CHALLENGE
The backdrop remains fraught. Although New Zealand’s economy has emerged from recession, growth is still anaemic and is being further squeezed by the Middle East turmoil, persistent uncertainty about the war’s broader global impact and a tight fiscal stance.
New Zealand’s cautious monetary policy approach echoes a broader global shift, with central banks forced into an inflation-first posture by the Iran war. Markets have steadily pared back expectations of rate cuts – and in some cases are even flirting with renewed tightening, particularly in Europe – while the Federal Reserve has stayed on hold, warning that an energy shock could keep price pressures uncomfortably high.
The Reserve Bank of Australia has already hiked rates twice this year to 4.10% and markets imply a better than even chance of a lift to 4.35% in May.
ANZ chief economist Sharon Zollner said the cash rate outlook is highly uncertain, but risks appear tilted towards the central bank moving to normalise policy sooner than ANZ’s December expectation.
“However, there is a lot of water to flow under the bridge yet.”
(Reporting by Lucy Craymer in Wellington and Wayne Cole in Sydney.Editing by Shri Navaratnam)
Comments