Conway’s comments push the policy conversation in a firmer direction than the QSBO release alone would suggest, tying the survey’s jump in cost pressures directly to the RBNZ’s own forecasting risk. The explicit reference to upside risk on the September quarter forecast, paired with a direct statement that further reduction in stimulus is likely required, reads as a clear signal the central bank is not done tightening despite the earlier ceasefire led easing in oil prices. The reassurance that medium term inflation expectations remain anchored and that spare capacity should limit pass through offers some balance, but the overall tone leans toward the RBNZ guarding against second round effects rather than looking past the shock.
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Oil has eased, but the RBNZ isn’t ready to call the inflation shock over.
Summary:
- RBNZ chief economist Conway said the Middle East conflict has complicated monetary policy in the same way all supply shocks do
- He said developments in the Middle East over the past week point to upside risks to the RBNZ’s September quarter forecast
- Conway said the effects of the shock will keep reverberating through the economy for some time even though oil prices have eased
- He said monetary policy can prevent first round price effects from turning into second round inflation pressure, and that spare capacity in the economy should help limit pass through
- Conway said medium term inflation expectations remain well anchored, which he described as encouraging
- He said some further reduction in monetary stimulus is likely to be required, and that the RBNZ will respond if Middle East linked inflation pressures prove more persistent than expected
Reserve Bank of New Zealand chief economist Conway signalled on Monday that the central bank sees rising upside risk to its inflation outlook from the Middle East conflict, even as oil prices have retreated from their recent peak. Conway said the conflict has complicated monetary policy in the way all supply shocks do, and that understanding how firms respond to cost shocks is fundamental to keeping inflation low and stable.
He was direct about the near term outlook, saying developments in the Middle East over the past week suggest upside risks to the RBNZ’s September quarter forecast, and that the effects of the shock will continue reverberating through the economy for some time yet, notwithstanding the recent easing in oil prices. That view lines up closely with the sharp jump in cost pressures reported in NZIER’s Q2 Quarterly Survey of Business Opinion, which showed the share of firms reporting higher costs rising from a net 37% to over half.
Conway framed the RBNZ’s job as preventing those first round price effects from becoming embedded second round inflation pressure, and pointed to two factors working in the central bank’s favour: medium term inflation expectations remain well anchored, which he called encouraging, and spare capacity in the economy should help limit how much of the cost shock passes through to broader prices. Even so, he said some further reduction in monetary stimulus is likely to be required, a signal that the RBNZ sees more tightening ahead rather than an imminent shift toward easing.
Conway added that if inflation pressures stemming from the Middle East conflict prove more persistent than currently expected, the RBNZ will respond. Combined with the QSBO’s own signal of building cost pressure, the comments suggest the central bank is treating the recent oil price pullback as a temporary reprieve rather than a resolution, and is keeping its options open heading into the next policy review.
This article was written by fl6553e4b45d84486a91658a8b3f02bf22 at investinglive.com.