Ruffled financial markets got the reassuring message they were looking for from Reserve Bank Governor Anna Breman - but serious longer term doubts remain about inflation and the need for higher interest rates.
Breman's outlining of the RBNZ's view on the Middle East conflict on Tuesday was hotly anticipated by financial markets that have been pushing up wholesale interest rates, prompting banks to increase mortgage rates.
And the reaction to the speech - which in substance said there would be no kneejerk reaction from the RBNZ to the crisis - was favourable.
BNZ head of research Stephen Toplis labelled the speech a "textbook response".
"The first clear message to markets is that it could take months for the central bank to determine that inflation pressures will last for the medium term. This being so, market pricing which, prior to today’s speech, indicated a 25% chance of a rate hike in April was given a serve. The RBNZ is not going to provide a knee jerk reaction to the jump in oil prices. It never was but it is now on record as saying so," he said.
Toplis thinks, however, it is almost certain that inflation expectations will rise.
"With annual CPI growth set to exceed 4.0% and to then stay outside the target band for all of 2026, it is almost certain inflation expectations will rise to levels that the Reserve Bank will be uncomfortable with."
Beware the 'second round'
He also thinks that "second round effects" from the crisis will be elevated.
"Weak demand suggests it will be more difficult for businesses to pass on increased input costs but the pressure on margins, which was already there, means businesses will have no choice. Sure, the pass through will be less than 'normal' but it will be there.
"And, lastly, we think the impact of the shock in the Middle East will be enduring. Given the damage that has been done to energy production infrastructure, it is highly unlikely prices of oil and gas will fall to levels seen prior to the start of this conflict. Also, it is expected New Zealand will choose to increase its resilience to such shocks which will come with a cost.
"So, we are more convinced than ever that the cash rate [OCR] will be raised relatively aggressively. We see the process starting in September. This was our view anyway. The circumstances have changed dramatically from demand-driven inflation to supply-driven inflation but it will be inflation all the same, and more so than we had originally expected."
Toplis is not expecting any move in the OCR at the review on April 8, nor any clear indication when rate increases might start.
ANZ chief economist Sharon Zollner said there are a number of ways the crisis could play out, "and wait and see is the appropriate response".
'Constant reassessment'
"The RBNZ will need to constantly reassess and rebalance the risks of inflation pressures becoming embedded with the risk of causing unnecessary economic pain in what is already a difficult situation. We continue to forecast that the first OCR hike will come in December, but we cannot emphasise enough that uncertainty is the only certainty at present," Zollner said. She said Breman's "calm and considered messaging" should be reassuring for markets.
"However, in this environment, ongoing volatility can be expected."
Westpac chief economist Kelly Eckhold and senior economist Darren Gibbs said the RBNZ "is very much sticking by the playbook here" by noting a bias to looking through what is currently judged to be a short-term supply shock.
"Monetary policy is poorly positioned to offset the short-term inflation impacts coming from the Iran war’s increase in oil prices and related supply chain impacts. The RBNZ’s focus on medium-term inflation pressures is entirely conventional, and the reality is that no one knows much about those right now."
They said what is known is that this shock has come at a time when the economy was at an early stage of the recovery and excess capacity remains high. Hence the situation is very different from 2022 when the Russian war impact on inflation added further medium-term inflationary fire to an already hot economy.
"Breman appropriately notes this as something that gives the RBNZ some space to assess whether these short-term pressures will translate to medium term pressures.
'Rate rises unlikely in next six months'
"It’s unlikely the RBNZ will be raising rates in the next six months. It’s going to take time to work out how long this shock lasts, the impact on the economy and excess capacity and the implications for medium-term inflation pressures. OCR cuts similarly look unlikely while this assessment is being made," Eckhold and Gibbs said.
In terms of political response to the Breman speech, Finance Minister Nicola Willis was asked if she was worried about Breman's statement about the prospect of higher inflation.
"No, I think we've been very upfront with New Zealanders that the global oil price shock will have an effect on prices here at home," she said.
"Kiwis can already see that when they fill up at the pump and it is true that will affect costs across the economy. So I think it's appropriate that the Reserve Bank Governor is commenting on that."
'Keep pressure off inflation'
Willis said she was pleased Breman was as focused as she was on keeping the cost of living low for New Zealanders.
The way they could do that was to keep pressure off inflation and ensure it doesn't skyrocked out of control, she said.
"We need a Reserve Bank focused on controlling inflation so that the cost of living doesn't get even worse for New Zealand."
Also asked about Breman's speech, Labour finance spokesperson Barbara Edmonds said: "It was very revealing as to actually what the sentiment is in New Zealand, which is, we are not well prepared for this Middle East conflict".
"Given unemployment is higher, growth is lower and ultimately there is less ability for businesses and for individual firms to be able to buffer what's going to come ahead. The major concern to me is the medium to long-term, particularly if this conflict carries on. What happens after seven weeks? What's the plan by the Government given that 80% of our refined fuels come from Singapore and South Korea?"
Additional reporting by Mandy Te
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