New Zealand OCR held at 2.25 percent amid inflation risks

Annual consumer price inflation in New Zealand reached 3.1 percent in the March quarter.

The Committee expects inflation to peak at 4.3 percent in the September quarter before returning to the 2 percent target mid-point by mid-2027.

Despite near-term pressures, core inflation, wage growth, and medium- to long-term inflation expectations remain consistent with the target over the medium term.

The Middle East conflict is identified as a key factor, disrupting global supply chains and increasing prices for petrochemicals, which in turn impacts fuel and other intensive inputs.

This is expected to drive first-round direct and indirect inflation effects this year, with elevated uncertainty around the near-term forecast.

The global economic outlook remains uncertain, with New Zealand's trading partners expected to face weaker growth and higher inflation.

Domestically, business confidence and spending are weak, consumer confidence has fallen, and the housing market remains subdued.

While weak demand and elevated unemployment are expected to dampen medium-term inflation, the Committee remains vigilant against increased costs leading to sustained inflation.

Financial conditions have tightened, with market expectations for central bank policy rates rising globally and domestically.

The Committee noted that the OCR will most likely need to increase sooner and by more than previously envisaged, with the pace depending on the balance between persistent wage- and price-setting behaviour and weaker economic activity.