New Zealand Reserve Bank keeps interest rate at 2.25%, warns that rising oil prices pose inflation risks

Investing.com- The Reserve Bank of New Zealand held its interest rate steady on Wednesday, unchanged despite warning that the near-term economic outlook is weakening, while still emphasizing that rising oil prices are increasing inflation risks.

The Reserve Bank of New Zealand kept its official cash rate at 2.25% unchanged, in line with market expectations, as policymakers weigh how the supply shock caused by the conflict in the Middle East will affect inflation and growth.

The Monetary Policy Committee said developments in the Middle East have “substantially changed” the outlook since the February meeting, and it expects higher energy prices to push up inflation in the short term while weighing on economic activity.

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The central bank forecasts that, driven by elevated fuel and transportation costs, overall inflation for the June quarter will rise to about 4.2%, up from 3.1% for the December quarter.

Inflation is expected to remain near the upper end of the central bank’s 1%-3% target range in the March quarter.

The New Zealand dollar rose 1.4% versus the U.S. dollar on Wednesday, following broad optimism sparked by a temporary U.S.-Iran ceasefire.

The committee warned that rising fuel prices and global uncertainty could weigh on domestic demand, as recent data show weakening business activity and consumer confidence.

The committee said the decision “strikes a balance between the potential benefits of taking preemptive action against rising medium-term inflation risks and the costs of unnecessarily suppressing economic recovery.”

The central bank noted that while inflation has been rising recently, weak demand and spare capacity in the economy may limit second-round effects on wages and core prices.

However, the central bank warned that if inflation expectations lose their anchor or price pressures broaden, “it will be necessary to raise the official cash rate decisively and in a timely manner.”

The central bank added that in recent weeks global financial conditions have tightened; rising market interest rates and a weaker New Zealand dollar have intensified inflation risks, while also supporting exporters.

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