The Reserve Bank of New Zealand (RBNZ) is expected to raise the cash rate by 25 basis points at its July meeting, according to a Monday report by BNZ Research.
In order for the stimulatory monetary policy to not to add to inflation, the cash rate needs to get back to neutral relatively quickly, BNZ said. All key economic data ahead of the meeting have been released and were broadly consistent with the RBNZ's May projections, leading to the expected start of a tightening cycle.
The oil futures markets imply that the Dubai Crude price closer to $68 pre barrel might be appropriate, compared with the central bank's assumption of around $101 per barrel across the quarter in May, BNZ said. This drop will have a marked impact on fuel price forecasts and the consumer price index.
Falling oil prices are likely to stimulate spending, which adds to the possibility that inflation ceases to be supply driven but instead becomes demand driven.
It forecast a 0.2% quarterly increase in the Household Labour Force measure of employment in the June quarter, taking the annual increase to 0.8%, BNZ said.
Before the conflict, inflation concerns were already building, and there was a strong argument for higher interest rates even without an oil price shock, it added.