Inflation increased to 4.1% in the June quarter because of higher fuel prices arising from the conflict in the Middle East. Core inflation, expected wage growth, and inflation expectations remain consistent with inflation returning to the 1 to 3% target band by mid-2027 and the 2% target midpoint later next year.
After lacklustre growth in the June quarter, New Zealand's economic recovery has most likely resumed but remains uneven. Resilient demand from New Zealand’s trading partners and strong export prices are supporting income growth and investment in export-exposed sectors and regional New Zealand. In contrast, weak income growth, job insecurity, and flat house prices continue to weigh on household spending and residential investment, particularly in Auckland and Wellington.
The recovery is expected to strengthen and broaden. The Committee expects New Zealand’s export sector to remain resilient and household spending to gradually increase. Conditions in the labour market should improve as the recovery gathers pace. Purchasing power will increase as inflation returns to the 2% target mid-point.
The global economy is facing significant risks that could affect commodity prices and demand for exports. New Zealand’s economic recovery could be stronger or weaker than expected and price pressures could generate more persistent inflation. The Committee remains vigilant and will respond as necessary to ensure inflation returns sustainably to the 2% target mid-point over the medium term.
The Committee judges that gradually removing monetary stimulus is appropriate to return inflation to the 2% target mid-point while supporting growth and employment. This decision reduces the risk that the OCR needs to increase by more later. Future policy decisions will depend on the Committee’s judgement of the balance of risks to medium-term inflation.
From the MPC Minutes.
Gradually removing monetary stimulus remains appropriate
The Committee discussed the monetary conditions required to return inflation sustainably to the 2% target mid-point.
When considering the policy response at this meeting, there was a clear consensus across the Committee. All members agreed that gradually removing monetary stimulus is consistent with achieving the medium-term inflation target, conditional on the outlook.
Members reflected on the potential trade-offs associated with a faster or slower monetary policy response. The Committee judged that its response balances containing inflationary pressures against the risk of holding the OCR and then having to raise it faster and to a higher level later.
All members agreed that the central projection for the OCR is appropriate. Conditional on the central economic outlook, members judged that the OCR may need to increase further. The Committee assessed that its monetary policy stance would guard against the effects of the oil price shock leading to persistently elevated price-setting behaviour, while supporting growth and employment.
However, the future OCR path is not pre-determined. The Committee’s response to data is not mechanical, as it depends on its assessment of various factors that impact inflation. Currently, indicators of medium-term inflation are consistent with inflation returning to target.
The Committee decided by consensus to increase the OCR by 25 basis points to 2.75%
The Committee judged that increasing the OCR to 2.75% is appropriate to sustainably return inflation to the 2% target mid-point while avoiding unnecessary instability in output, employment, interest rates and the exchange rate.
Future policy will depend on the Committee’s judgement of the balance of risks to medium-term inflation. This approach allows the Committee to observe and assess the effects of reduced monetary stimulus.
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