OCR On Hold At 2.25%

The Monetary Policy Committee today agreed to hold the OCR at 2.25 percent. Since the February Monetary Policy Statement, events in the Middle East have materially altered the outlook and the balance of risks for inflation and economic growth in New Zealand. In the near term, inflation is expected to increase and the economic recovery to weaken. The Committee is vigilant to any generalised inflationary pressure and stands ready to act to return inflation to its medium-term target.

The Middle East conflict has disrupted global supply chains, leading to significantly higher prices for oil and refined petroleum products. As a result, near-term inflation is increasing and economic growth is weakening in many countries. Global financial markets have been volatile and market interest rates have increased.

In New Zealand, the extent of the near-term increase in headline inflation will depend on how the conflict in the Middle East evolves and the magnitude and duration of the disruption to global supply chains and energy markets.

Medium-term inflationary pressure will depend on the extent to which higher costs influence price- and wage-setting behaviour by firms and workers in the economy. If medium-term inflation expectations increase, then inflation is likely to become more persistent. However, weak demand and spare productive capacity in the economy should constrain the degree to which higher costs can be passed on.

The current economic situation is different to 2022 when COVID-19 and Russia’s invasion of Ukraine disrupted global supply chains and increased energy prices. Back then, demand was growing strongly, adding to inflation pressure.

The Committee’s decision to hold the OCR balances the potential benefits of responding pre-emptively to the risk of higher medium-term inflation against the cost of unnecessarily stifling the economic recovery.

The Monetary Policy Committee is focused on ensuring that inflation returns to the 2-percent target midpoint over the medium term. This requires core inflation and wage growth to remain contained and medium- and long-term inflation expectations to remain around 2 percent. If these conditions are not met, decisive and timely increases in the OCR would be required.

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