Reserve Bank of New Zealand Governor sets out MPC framework for responding to Iran conflict and flags near term inflation rise

The Reserve Bank of New Zealand published a speech by Governor Breman on the economic implications of the ongoing Middle East conflict, warning that New Zealand is likely to face higher headline inflation in the near term alongside weaker growth momentum. The speech also sets out the framework the Monetary Policy Committee (MPC) will use to judge the appropriate monetary policy response to the conflict’s effects. Governor Breman highlighted a risk that global financial stability pressures could affect the cost and availability of funding for New Zealand banks, while noting that recent stress testing indicates banks are resilient with strong capital and liquidity buffers. The MPC’s approach is framed around avoiding an early reaction to near-term inflation pressures that monetary policy can do little about, while also avoiding reacting too late if above-target inflation becomes embedded; the Committee will focus on ensuring any temporary inflation spike does not turn into enduring inflationary pressures and on delivering low and stable inflation over the medium term.