Chief economist flags persistent inflation risk as Middle East conflict still ripples through costs
Reserve Bank chief economist Paul Conway (pictured) has warned that New Zealand's inflation outlook remains fragile, even as near-term pressures from the Middle East conflict start to ease.
In a speech to BusinessNZ in Wellington, Conway said oil and petrochemical prices had climbed sharply after the Strait of Hormuz crisis disrupted global supply chains from late February, though shipping has since partially resumed and price pressures have moderated.
The RBNZ now forecasts inflation at 3.9% for the June quarter and 3.3% for the current quarter, down from earlier estimates of 4.2% and 4.3% respectively. Even so, Conway cautioned that "the conflict has still delivered another significant inflation shock" and that the central bank's task is ensuring the shock doesn't "morph into persistent inflation."
The comments follow the RBNZ's decision earlier this month to lift the official cash rate by 25 basis points to 2.5%. The Monetary Policy Committee judged inflation "remains too persistent to leave policy unchanged," even as it acknowledged the same easing oil-price backdrop Conway referenced in his speech.
Firms pass on costs faster than they cut them
At the heart of Conway's speech was new RBNZ research into how New Zealand businesses set prices. He said local firms now pass on cost increases more readily than in the past, while being slower to lower prices when costs ease — a pattern most pronounced in the services sector.
"When inflation is high, people pay closer attention to it," Conway said, adding that this heightened attention "raises the risk that temporary shocks becoming persistent inflation."
This pricing asymmetry matters for borrowers because it shapes how long elevated interest rates may need to stay in place.
Conway noted that medium-term inflation expectations remain "well anchored" for now, and spare capacity in the economy should help limit how much firms can pass on to consumers. However, he warned that "after a prolonged period of above-target inflation, anchored inflation expectations cannot be taken for granted."
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