Major conflict erupting in the Middle East has been sobering news for New Zealanders eager for respite from the cost‑of‑living crisis, with higher oil prices pushing up costs across fuel, food, construction and beyond.
But instead of panicking, the Reserve Bank is choosing to “look through” short-term spikes in inflation without raising the Official Cash Rate (OCR).
That may lead people to ask: why wait?
And how long is it before a spike is no longer considered “short-term”?
In episode 69 of Bridge talks Business, Chief Reserve Bank Economist Paul Conway was clear: inflation shocks are coming this year. But that doesn’t mean we should panic.
“There’s nothing we can do to prevent inflation being higher in Q2 of this year,” said Conway.
“For example, even if we increase the OCR now, that inflation is headed our way. The optimal response from the RBNZ is to look through that.
“Changes in interest rates today have their peak impact on inflation in 12 to 18 months. That’s where we can influence inflation – anything shorter‑term than that, we have very limited ability to control.”
Bloomberg has reported that some local economists expect inflation to exceed 4% by mid‑2026, as higher oil and fuel prices flow through the economy. In recent remarks, Reserve Bank Governor Anna Breman warned that reacting too quickly to a short‑lived inflation shock would risk dampening economic growth, without materially improving near‑term inflation outcomes.
The pressure being exerted on household budgets comes not just from higher prices, but from the gap between inflation and wage growth. As Conway explained, affordability is ultimately about purchasing power – how far wages go once rising costs are taken into account.
Conway specified that by inflation shocks in the “short-term”, he meant “over the next few quarters” of 2026. Should it continue to rise beyond that, the RBNZ would consider taking action.
“If it persists into the medium term,” Conway told Bridge, with higher inflation becoming embedded in pricing and wage‑setting behaviour, “those are the second-round inflation area effects that the monetary policy committee would lean against in the form of higher interest rates.”
Conway also stressed that the RBNZ can only do so much when it comes to affordability. Its role is to stabilise inflation – not to drive wages or productivity directly.
“People often give monetary policy an outsized responsibility,” he told Bridge.
“I think because we’re in the media a lot, people think that monetary policy is economic policy, but tweaking interest rates here and there to control inflation [is only laying] the foundation for long run prosperity. It takes a lot of other pieces of the jigsaw puzzle to come together before we get what we’re after.”
Bridge summed it up neatly, suggesting the RBNZ is “the calm seas – we need someone with a boat and a captain to sail that thing.”
Catch the full conversation between Ryan Bridge and Paul Conway in Bridge talks Business episode 69.
