Global: New Zealand central bank chief warns of inflation and economic risks

New Zealand’s central bank governor has warned that sustained increases in global oil prices could push inflation somewhat higher than previously projected, while highlighting continued risks to the country’s economic recovery.

In notes from a speech delivered in Dunedin on Tuesday, Reserve Bank of New Zealand Governor Anna Breman said the economy was expected to strengthen and broaden, supported by exports and a gradual recovery in household spending.

Higher oil prices could lift inflation

Breman said recent increases in global oil prices and longer-term interest rates reflected the challenging external environment facing the New Zealand economy.

“Recent increases in global oil prices and longer-term interest rates reflect the challenging environment we face,” Breman said.

“If higher oil prices persist, they are expected to result in somewhat higher near-term inflation than we assumed in the September statement.”

The warning comes after the Reserve Bank of New Zealand (RBNZ) raised its main cash rate by 25 basis points to 2.75% at its September policy meeting. However, the central bank signalled a more gradual approach to further tightening than had been anticipated by many financial market participants.

The RBNZ also projected that consumer price inflation would ease slightly to 3.9% in the September quarter, compared with 4.1% in the previous quarter.

RBNZ maintains focus on inflation outlook

Despite the inflation risks, Breman said the broader economic recovery remained on track, with exports and an improvement in household spending expected to support activity.

She said the central bank would continue monitoring incoming economic data and developments in global markets before its next policy decision.

“As always, we will assess incoming data and global developments ahead of our next decision in October and remain focused on the outlook for inflation over the medium term,” Breman added.

The RBNZ is scheduled to meet on October 28 to review monetary policy. Market pricing currently implies a 75% probability of another rate increase, which would take the cash rate to 3%.

The central bank’s next decision will therefore be closely watched as policymakers balance persistent external inflation pressures against the pace and breadth of the domestic economic recovery.