New Zealand’s inflation outlook has become increasingly uncertain as the ongoing Middle East conflict drives higher oil prices, with ANZ warning the Reserve Bank faces a difficult balancing act in setting monetary policy.
In a research note released on March 19, ANZ said it had updated its CPI forecasts to reflect rising oil prices, but cautioned that the medium-term impact on inflation remains highly uncertain.
The bank said the conflict has moved beyond a “short, sharp shock”, with prolonged disruption to oil supply and shipping routes increasing the risk of sustained price pressures.
“But for as long as goods cannot enter or leave the Persian Gulf via the Strait of Hormuz, and global oil production is constrained, the New Zealand economy will be affected,” the report says.
While inflation is expected to lift sharply in the near term, ANZ outlined two “deliberately extreme” contrasting scenarios for how the shock could play out over time. It noted both scenarios are high impact, but low probability that focus on the potential implications for medium-term inflation.
In the first scenario, inflation becomes more persistent, driven by strong demand, constrained supply and policy settings that remain too loose for too long. That could see inflation expectations rise and force the Reserve Bank of New Zealand (RBNZ) into a more aggressive tightening cycle.
In the second scenario, the shock acts as a drag on economic activity, with higher fuel costs weighing on households and businesses. In that case, inflation pressures would ease over time and the RBNZ could ultimately be forced to cut the Official Cash Rate (OCR) more aggressively.
ANZ said both scenarios assume a near-term spike in inflation, but differ significantly in their longer-term implications.
At this stage, the bank said it was difficult to determine which path the economy will follow, noting the risks are “not even mutually exclusive”.
The uncertainty leaves the RBNZ in a challenging position, as monetary policy decisions must be made before the full impact of the shock becomes clear.
ANZ said the “path of least regrets” for policymakers is to broadly stick to the current OCR trajectory while monitoring how inflation expectations and economic conditions evolve.
“But in the meantime, the RBNZ’s tone could quite rightly skew more towards leaning against the upside inflation risk,” the report says.
The bank added that while the current shock is likely to have a meaningful impact on inflation, it is unlikely to be as severe as the COVID-19 pandemic, although potentially more significant than the oil shock following Russia’s invasion of Ukraine in 2022.
ANZ expects economic growth to slow but remain positive, with the inflation impact likely to outweigh the effect on GDP.
The report highlights the complexity facing policymakers, with the central bank needing to distinguish between a temporary supply shock and one that could embed longer-term inflation pressures.
As ANZ notes, that distinction may only become clear “with 20/20 hindsight well after the fact”.
