Reserve Bank Governor Anna Breman says 'monetary policy will have to react' if a wage-price spiral emerges

Reserve Bank Governor Anna Breman is encouraging businesses that can "see through" temporary cost pressures to do so, rather than increase prices, and says if the central bank sees a wage-price spiral emerging "monetary policy will have to react."

Breman was speaking to media in Auckland on Tuesday, where she's giving a speech on the shockwaves impacting the New Zealand economy, including surging fuel prices, due to war in the Middle East.

Asked about discussions with businesspeople, Breman said Reserve Bank staff listen very carefully.

"There are lots of differences. Some businesses are doing well and have been doing well for some time. Some businesses are struggling in this environment and they will be facing higher cost pressures. And I think the key message is that for those businesses who have the ability to see through temporary cost pressures, that would be really welcome in the longer run," said Breman.

"But again, it's up to each and every business to make their own decisions."

She noted that surging fuel prices, and other rising input costs such as fertiliser, means some firms are facing "somewhat higher cost pressures."

"So we'll be looking into whether they pass on those costs to consumers or whether they expect to absorb them because they expect this to be passing over the medium-term," Breman said.

"But importantly that's what we call first round indirect effects. But very importantly we will also watch out for what we call second round effects. So that is if we see anything that threatens inflation expectations to become de-anchored, or if we see a wage-price spiral ... if we see that then monetary policy will have to react to stop that from happening."

A wage-price spiral is a scenario where rising living costs lead to workers seeking higher wages, increasing business labour costs and causing further price increases in a self-fulfilling manner.

Breman said the Reserve Bank is "looking very carefully" at inflation expectations and the price setting behavior of businesses.

The Reserve Bank's key monetary policy tool is the Official Cash Rate, which is currently at 2.25%. The latest official inflation figures, Statistics NZ's Consumers Price Index, showed annual inflation at 3.1% in the December quarter, just above the Reserve Bank's 1% to 3% target range.

A Reserve Bank survey of businesses released in February showed the mean expectations were for inflation in two-years' time to be at 2.59%.

Asked whether she had any concerns that stagflation might emerge, Breman said she doesn't at this stage. Stagflation is when an economy is stagnating and there's high inflation, which can lead to rising unemployment.

"I don't have [stagflation] concerns right now. What we do expect is some higher near term inflation and somewhat weaker growth. But we still expect the economy to grow this year. And again if this supply disruption, so the higher oil price, turns out to be temporary, I do expect to see really decent growth later this year," Breman said.

"But in the near term I think we'll see households, and maybe some firms, being a bit more cautious."

Asked what the medium-term means to the Reserve Bank, Breman said about the next 18, 24 months.

"There's no exactness in that. Say, over the coming two years."