RBNZ pulls the trigger

The Monetary Policy Committee today reached consensus to increase the OCR by 25 basis points to 2.50%.

Following the partial reopening of the Strait of Hormuz, global oil prices have fallen markedly. Other petrochemical prices have also moved lower. As a result, near-term inflation pressures have eased.

Although energy prices have decreased, the effects of the shock will linger for some time and the outlook for medium-term inflation pressures remains uncertain. The stance of monetary policy is calibrated to bring inflation back to target without causing unnecessary economic instability.

Global growth has been resilient to the effects of tariffs and conflict in the Middle East, largely because of strong AI-related investment and spending on defence and economic security. Headline inflation in New Zealand’s trading partners has increased but is expected to ease to close to 2% in 2027.

Markets expect global policy rates to increase above pre-conflict levels, as central banks may need to respond to persistent energy-driven inflation pressures.

New Zealand’s economic recovery was underway before the Middle East conflict, but lost momentum in the June quarter as the oil shock weighed on economic activity.

Growth is expected to resume in the September quarter as these effects fade and confidence improves. Over the medium term, inflation returning to the 2% target mid-point will lift household purchasing power and help support a sustained recovery in growth and employment.

The outlook for medium-term inflation pressures depends on the extent to which recent cost increases feed through into higher prices.

Spare capacity in the economy is expected to limit firms’ ability to pass on higher costs, meaning many businesses may need to absorb them in margins. However, some firms may look to rebuild margins as demand recovers. If sustained, a lower exchange rate could also add to medium-term inflation pressures.

With inflation still above target and economic activity expected to strengthen, some further reduction in monetary stimulus is likely to be required to return inflation to the 2% target mid-point.

Future OCR decisions will depend on how incoming data, price-setting behaviour, and the strength of economic activity affect medium-term inflation pressures.