New Zealand’s chief economist, Paul Conway, said Tuesday that the pace of inflation slowdown may not be as fast as the Reserve Bank has predicted, suggesting further interest rate hikes could be possible in the future.
The Reserve Bank of New Zealand last week lowered its third-quarter inflation forecast from 4.3% to 3.3%, reflecting a drop in fuel prices following the temporary agreement between the U.S. and Iran. However, in recent days, oil prices have rebounded amid renewed conflict in the Middle East.
Conway said in a speech in Wellington: “I believe the developments in the Middle East over the past week suggest an upside risk to our forecast for the September quarter. If inflationary pressures from the Middle East conflict prove more persistent than expected, we will take appropriate measures.”
The Reserve Bank of New Zealand raised its official cash rate to 2.5% last week, the first increase in three years. The bank said the move aims to gradually phase out economic stimulus and ensure inflation returns to the midpoint of its 1–3% target range by next year. Investors expect the official cash rate to rise to 3% in December.
Policymakers are concerned that inflation could become entrenched in the medium term and therefore aim to return the official cash rate (OCR) to a neutral level. They also expect the economy to recover in the second half of 2026, which could intensify upward pressure on prices.
Swap market data shows that the Reserve Bank of New Zealand’s hawkish stance and a series of positive economic indicators have led traders to bet on two more rate hikes this year, with another increase expected in the first quarter of 2027.
These expectations have boosted the New Zealand dollar, which has risen 1.7% since the central bank’s meeting on July 8. On Tuesday, the New Zealand dollar also climbed to a three-month high against the Australian dollar, as interest rate outlooks diverged between the two central banks.
Conway said, “Short-term inflation pressures appear to have eased, at least for now, which is certainly positive. However, the conflict continues to deliver another significant inflation shock to both the global and New Zealand economies.”
The Reserve Bank of New Zealand believes there is sufficient excess capacity in the economy, which will make it harder for businesses to pass on rising costs to consumers.
Conway added, “Excess capacity is also expected to influence firms’ pricing decisions, making price-setting behavior increasingly consistent with low and stable inflation expectations over time. A reduction in monetary stimulus also implies lower inflation pressures in the medium term.”
However, a survey released Tuesday by the New Zealand Institute of Economic Research suggests that companies still appear determined to push forward with price increases.
New Zealand’s Economic Research Institute Deputy Chief Executive Liang Keli said at a briefing: “We are indeed seeing an increase in cost and price indicators. This suggests that inflationary pressures in New Zealand’s economy are intensifying.”
Conway said that although oil prices have declined, the impact of this shock will continue to affect the economy for some time.
He said, “Inflation becomes more persistent when businesses can more easily pass on higher costs. And the stronger inflation persists, the greater the effort monetary policy must make to bring it back to target levels.”
