Reserve Bank (RBNZ) Deputy Governor Christian Hawkesby says the central bank is focused on how rising oil prices, caused by the Russian invasion of Ukraine, will influence inflation in the medium-term.
Speaking to interest.co.nz on Monday, Hawkesby acknowledged, “If oil prices stay where they are at the moment, that’s higher than where we projected in our Monetary Policy Statement [released on February 23].
“So, the very near-term implication is that we’ll have higher CPI [Consumers Price Index] outturns over the next quarter or so than we had factored into our statement.
“The key judgement for the Monetary Policy Committee will be - we can’t control that. It’s happened, it’s come from overseas, what does that then mean for the outlook for inflation going forward? And that’s the thing that we really need to stay focussed on.
“We are in an environment where locally, inflation expectations have been rising - in part because what people have seen with recent headline inflation. So, the key question will be, how much of that spills over into higher inflation expectations further out in the window where we can make choices about leaning against that or not?”
While oil prices have risen more than the RBNZ expected when it hiked the Official Cash Rate less than a week ago to try to get on top of high inflation, Hawkesby said the central bank identified geopolitical tensions in the Ukraine escalating as one of the risks facing the economy.
“Markets had put a reasonable probability on this crisis, or on this amount of geopolitical tension brewing. So, some of that was priced in,” Hawkesby said.
“Given what’s happened since the Statement, we’re just going to have to reassess, as we do every six weeks, what the implications are for our mandate.”
Financial stability concerns
Hawkesby said an “immediate” issue the Bank is focussed on is ensuring financial markets operate smoothly, as pro-Ukraine countries try to block Russia from engaging in financial markets.
Pro-Ukraine countries have for example cut off Russian banks from the SWIFT international payments system.
Hawkesby said the RBNZ doesn’t have Russian banks in its payments system, but New Zealand companies that export to Russia will need to consider how their clients pay them.
He said he was mindful of the financial system potentially “gumming up”. He feared there could be “a rush for liquidity; a rush for US dollars as a way for financial market participants to free themselves of that dysfunction”. This could “create challenges in funding markets”.
Hawkesby likened these potential challenges to those the RBNZ faced at the 2008 Global Financial Crisis, as well as in early-2020 when Covid-19 really hit.
He said the RBNZ could respond by injecting more liquidity into the financial system - taking collateral and providing liquidity in New Zealand dollars.
Interest.co.nz also talked to Hawkesby about monetary policy more broadly. Listen to a discussion about what the RBNZ’s appetite for higher unemployment is, as it lifts interest rates to curb inflation from 6:25. For more on the unwinding of its Large-Scale Asset Purchase programme, or selling of government bonds, listen from 11:06.