Annual consumers price inflation was 3.1 percent in the March quarter. The Middle East conflict is increasing near-term inflation and weakening economic activity. Inflation is expected to peak at 4.3 percent in the September quarter and to return to the 2 percent target mid-point in mid-2027. Currently, core inflation, wage growth, and medium- to long-term inflation expectations remain consistent with inflation returning to the 2-percent target mid-point over the medium term.
The global economic backdrop remains uncertain. Supply chain disruptions, higher prices for petrochemicals, and a more fragmented global trading environment are impacting the outlook. Growth will vary across countries, reflecting differences in energy intensity, fiscal support, and exposure to AI investment. On balance, New Zealand’s trading partners are expected to see weaker growth and higher inflation.
Domestically, business contacts and surveys indicate weaker confidence and spending. For some firms, rising costs are squeezing profit margins and curbing investment and hiring intentions. Consumer confidence has fallen sharply, and the housing market remains weak. Economic conditions continue to differ across regions and sectors, with high commodity prices supporting incomes in regional New Zealand.
The outlook for medium-term inflation pressures is also uncertain. These could remain elevated if households and businesses expect higher costs in future and build those expectations into price- and wage-setting decisions today. However, weak demand and elevated unemployment will dampen medium-term inflation pressures.
The Committee remains focused on ensuring that increased costs do not lead to elevated inflation over the medium term, while avoiding unnecessary economic volatility. On balance, the OCR will most likely need to increase sooner and by more than envisaged in the February Monetary Policy Statement. The pace of OCR increases will depend on the relative influence of persistent wage- and price-setting behaviour versus weaker economic activity on medium-term inflation pressures.
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