While near-term inflation pressures in New Zealand appear to have eased, renewed tensions in the Middle East over the last week present upside risks to the central bank's 3.3% inflation forecast for the September quarter, Reserve Bank of New Zealand (RBNZ) Chief Economist Paul Conway said Tuesday.
The conflict delivered another significant inflation shock to economies across the globe, and the challenge for monetary policy is to make sure that a temporary increase in petrochemical prices does not lead to persistent inflation, Conway said in a speech at a Business New Zealand event in Wellington.
The RBNZ previously forecast inflation in New Zealand to be 4.2% in the June quarter and 4.3% in the current quarter, but reduced those estimates to 3.9% and 3.3%, respectively, in its latest monetary policy review.
Research indicates that businesses in New Zealand pass on cost increases more readily now than in the past, and are less likely to cut prices when costs fall, which raises the risk of temporary shocks morphing into persistent inflation, Conway said.
Larger firms tend to reprice more frequently, so their pricing decisions can offer an early signal on inflationary pressures, and understanding such price-setting behavior will be key as the RBNZ strives to bring inflation back to within its 1% to 3% target range over the medium term, the economist said.
"Taken together, these findings suggest that cost shocks may now pass through and become embedded in inflation more quickly than in the past," Conway said, adding that properly guided monetary policy can prevent this from happening.