Reserve Bank should ‘avoid reacting too early’ to higher inflation, says governor

Tuesday, 24 March 2026

Reserve Bank governor Anna Breman says the bank should avoid reacting too early to near-term inflation pressures that “monetary policy can do little about”, setting out her thoughts on the potential impact of the conflict in the Middle East.

However, she said it would also need to avoid reacting too late if above-target inflation became embedded in the economy.

Breman made the comments in an advance copy of a speech she intends to deliver to a BusinessNZ audience in Auckland this afternoon, which was released on the bank’s website this morning.

The conflict in the Middle East was likely to see higher headline inflation over the near term, and “somewhat weaker growth”, she said.

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Even if the conflict in the Middle East ended soon, the effects would linger, she said.

“The Middle East is likely to be severely impacted for a long time due to the loss of infrastructure and global confidence. It is important that we do not underestimate the complexities of the disruptions caused by the conflict in the Middle East.

“The shock is reverberating through complex global supply chains. It will take time for the full effects on the global economy to play out, and before the full picture emerges in the data.”

She drew a distinction between the rise in inflation that followed the Covid pandemic and the current shock.

“In 2022, the last time global oil prices increased above US$100 a barrel, we were in an environment of strong global and domestic demand.

“The current economic environment is different. While the recovery has broadened, it is still in its early stages, and the New Zealand economy continues to operate below capacity,” she said.

“Household and business balance sheets are also more fragile, with less scope to absorb significant price increases. This means it may be harder for businesses to increase prices, and it could be less likely that short-term price pressures driven by supply-side shortages will become embedded in medium-term inflation.”

A “short-lived disruption and a temporary increase in petrol prices” can – and should – be looked through from a monetary policy perspective if it was unlikely to have an impact on medium-term inflation outcomes, she said.

“For this type of disruption, we would likely see higher inflation over the next few quarters, along with squeezed real incomes and demand.”

Given the lags in monetary policy, a response to that would only “dampen growth without materially improving near-term inflation outcomes,” she said.

But Breman said the picture would change if the disruption was longer lasting, there were longer-lasting impacts on global productive capacity or domestic demand, or if there was a greater risk of heightened oil and other import prices feeding into higher inflation expectations.

“If there are effects on medium-term inflation or inflation expectations, the appropriate policy response could be to increase interest rates to prevent these second-round effects.”

ANZ chief economist Sharon Zoller said financial markets were earlier this morning pricing in three increases to the Official Cash Rate this year, which if implemented by the central bank would take the OCR back up to 3%

But Zollner described Breman’s speech as reassuring. The tone was “it’s early days and ‘wait and see’”, she said.

Breman said some of the “secondary impacts” from the Middle East conflict could take a long time to fully manifest themselves.

Futures pricing for fertiliser from the Middle East had “increased considerably” since the and global prices for wheat, corn, and soybeans had also picked up, she noted.

But higher fertiliser prices could take up to nine months to fully pass through to supermarket prices for some foods, she said.

“Autumn fertiliser requirements are already on-hand in New Zealand, and fertiliser imports usually decrease over the winter months. We expect fertiliser use to pick up for spring planting, which is when we may see more direct impacts on farms.

“In the northern hemisphere, the spring planting season is just starting, meaning higher fertiliser prices could pass through more quickly into on-farm costs and consumer prices. New Zealand is a price-taker for certain foods, so we may see some price impacts in coming months.”

Currency markets did not show any immediate, observable response to Breman’s comments, with the New Zealand dollar continuing to trade around 58.5 US cents.

Zollner said the two‑year swap rate fell about five basis points to 3.56%.

That could indicate bond traders viewed the speech as being mildly dovish on the interest-rate outlook, but Zollner said it was “difficult to precisely disentangle the impact” of Breman’s comments, given market volatility.