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Introductory statement by Governor Anna Breman

Anna Breman:

Kia ora, everyone. Welcome to RBNZ's Main Monetary Policy Statement. I'm Anna Breman, Reserve Bank Governor and Chair of our Monetary Policy Committee. I'm joined on stage by my fellow Committee members, Karen Silk and Paul Conway and we have Hayley Gourley, Prasanna Gai, and Carl Hansen here at the front row. Over the next 10 minutes, I'll talk you through our decision today and our assessment of the inflation outlook and we then look forward to hearing your questions.

Today, the Monetary Policy Committee voted to leave the OCR on hold at 2.25%. Three Committee members voted for the hold and three voted to increase the OCR by 25 basis points. I used my casting vote to hold. Members in favour of raising the OCR were more concerned with the risk of cost pressures leading to stronger second round effects on inflation. Members in favour of the hold also saw inflationary pressures but emphasised low core inflation, subdued wage growth, and well anchored medium and long-term inflation expectations. These members also put more weight on weak demand and tighter financial conditions as likely to dampen second round price increases.

All Committee members agreed on the economic projections and on the path for the OCR. The difference was in our preferred timing for the initial increase and for further information on the individual Committee members' views, I refer to the record of the meeting. So this is indeed the first Monetary Policy Statement with attributed votes and names of the Monetary Policy Committee members in the record of the meetings. And as a Committee we will welcome this increased transparency and we believe it will strengthen New Zealander's understanding of monetary policy going forward. So turning to the basis for our decision, as you all know, the Middle East conflict is leading to major supply side disruption in the global economy. The supply of oil, gas, and other petrochemicals such as fertilisers flowing through the Strait of Hormuz has been severely disrupted now since several months back. So this is leading to higher near term inflation and weaker growth in many economies, including New Zealand.

So here in New Zealand, annual headline inflation was 3.1% in the March 2026 quarter. This was slightly higher than expected, largely due to higher fuel prices since the beginning of the conflict. So we expect inflation to increase to 4.2% in the second quarter that's in line with our April assessment and peak at 4.3% in the third quarter of this year. This is due to direct effects from higher fuel prices and the indirect effects of higher prices for products that use fuels such as transport. We cannot prevent higher near term inflation because changes in the OCR affect inflation with what we tend to say long and variable lags, but we can prevent higher costs from becoming embedded in the economy and increasing medium term inflation. So we expect inflation to fall back to round the 2% target midpoint in mid 2027 and that's the forecast you see on this slide and the Committee will set monetary policy to achieve this outcome.

Also important that is in terms of our starting point, the blue line in this chart is core inflation and that measures the persistent component of inflation. It's less volatile than headline inflation and is a useful guide to medium term inflation pressures. Core inflation remains well within the band and it has actually been gradually falling. Also important for the outlook in line with higher near term inflation, one and two year ahead inflation expectation have risen. You see that on this chart, but medium term to longer term inflation expectations remain close to 2% and they actually fall slightly in April. So this is important because people know inflation will be around 2% in the medium term and we expect the middle of 27. Then it's less likely to cause persistence in inflation and that makes it easier and less costly for us to bring inflation back to target.

So before I move on, let me acknowledge that this is a challenging environment for both New Zealand businesses and for households. So in this graph, you see businesses that are facing higher cost pressures from higher prices for things from things like fuel and transport and fertilisers. Some will try to protect the profit margin by increasing prices, but demand is weak for many firms and it makes it difficult to lift prices and lowering the risk of inflation becoming embedded in the economy. So this graph really shows you what they expect going forward. So higher cross pressures, but they don't expect to hike prices that much. If we'd move to households, they're also worse off because of near term higher inflation. Real income growth is weaker than it was before the conflict. The labour market is also weak. So we expect unemployment to be around 5.4% until mid next year and that will dampen wage growth and also lower the risk of inflation becoming entrenched.

So to summarise our central projection, we do see weaker near term growth, a softer labour market and higher near term inflation, but over the medium term, inflation falls back to target and growth picks up and that's what you see in this graph. So to the decision, the Committee has agreed on this economic projections, but the Committee also agree that the OCR would most likely need to increase sooner and buy more than projected in the February Monetary Policy Statement and that's what you have in this graph. And this is necessary to guard against higher near term inflation becoming embedded in the economy. The pace of OCR increases will depend on the net effect of persistent wage price setting behaviour versus weaker economic activity and how those two effects play out over the medium term. I want to stress that the outlook for inflation is of course uncertain, both in the near and the medium term and there are many possible different paths for monetary policy from here.

So to illustrate the risks to the outlook and importantly how monetary policy could respond, we present three alternative scenarios in the Monetary Policy Statement. You have them here. The grey line is our central projection that is based on the future oil curve from May 21st and all other, what you say, assumption is in the monetary policy statement on pages 51 to 54. So that's the grey line, but we then also have three alternative scenarios. So the first one, oil prices stay higher for longer and firms and workers pass on higher cost enterprises and wages. And then the OCR may need to increase by more than in our central scenario and that's the orange line. We have a second scenario and that has the same higher oil prices that stay higher for longer, but firms and workers absorb more of the cost and then fewer increases in the OCR would be required to return inflation to target and that's in this purple line.

And this illustrate that it's not just global factors that will influence outcome for New Zealand, but also how domestic firms and household actually respond. The third scenario there we assume the same oil prices in the central projection, but global and domestic demand weakens more than in the central projection and that limits firms and workers' ability to pass on cost increases, then inflation could fall below the target midpoint, requiring monetary policy to be accommodative for longer. And you see that in the green line and basically the OCR is on hold. So let me emphasise that these scenarios are indicative. Even if oil prices and price setting behaviour evolve in line with any of these scenarios, monetary policy response could differ. Models cannot capture all factors influencing medium term inflation pressures.

So let me summarise the conflict in the Middle East is pushing up near term inflation and slowing the recovery. The Committee is focused on stopping these cost increases from turning into persistent inflation while avoiding unnecessary volatility in the economy. On balance, the OCR will likely increase at coming meetings. We are working in an uncertain environment and if the outlook for inflation changes, we will adjust the stance on monetary policy to ensure that inflation returns to the 2% target midpoint over the medium term. So before I open up for question, I would like to thank the Reserve Bank team for high quality insights and analysis that have gone into this monetary policy statement. And I would also like to thank all my MPC colleagues for your constructive contributions and excellent deliberation over the past fortnight. I look forward to a question and I'm going to pass to now Mi Mitchell to traffic your questions.

Ainsley Thompson (Bloomberg): Hi Ainsley Thompson from Bloomberg. It was a split decision. The market's almost fully pricing in a July hike. Is that more likely than not that we'll see that?

Anna Breman: So what we are saying is that we think that OCR increases are likely at coming meetings. Of course, it will depend on how the data evolves, how the outlook for inflation evolves and also the balance of risks, but our main forecast is we do expect OCR increases at coming meetings.

Tom Pullar-Strecker (The Post): Tom Pullar-Strecker from The Post. Even in a 3/3 vote, if my maths is correct, there's only a 10% chance of that splitting the way it has with all of the internal members voting one way and all of the external members voting the other way. Is that a coincidence and if not, what should we read into that?

Anna Breman: First of all, I think that we all agree that it's very good that we have a Committee. Research shows very clearly that Committees make better decision. Everyone has an individual vote and everyone has individual accountability for their votes. We also have a procedure where we make sure that the first time we discuss the decision after we look at all the forecasts is actually anonymous, just to ensure that there's no individual kind of feeling that I don't want to reveal it at any way. So I would say that people are completely free to vote the way that they want to and we're also very pleased that this time we have increased the level of transparency so there's more information on the justification for different votes in the record of the meetings.

Tom Pullar-Strecker (The Post): Just a quick follow up in the interest of the further transparency, is the bank ever aware of there ever being a situation where the internal members of the Reserve Bank voted differently on the OCR decision?

Anna Breman: That I can't answer given that I wasn't here at that time. Do you want to comment, Paul or Karen?

Paul Conway: Not that I recall, Tom, in my four years on the Committee.

Karen Silk: Yes, there has been votes before where internal members have voted differently.

Brian Fallow (Media): Hello, Brian Fallow. Why are you so sanguine about the risk or the prospects of inflation expectations remaining anchored over the medium term, given that for only one of the past six years has annual CPI inflation been within the target band and now we have this new major shock?

Anna Breman: So I think that our job is to ensure that inflation returns to target and that medium term inflation and long term inflation expectations remain well anchored. And if we look over the past over 30 years when we've had an inflation target, inflation has at several times, especially headline, peaked but returned relatively quickly to the target. So we will act to ensure that inflation returns to target over the medium term and that will help inflation expectations remaining well anchored.

Paul Conway: And you see that clearly, Brian, in the OCR forecast being brought forward and increased consistent with inflation pressures that you're talking about.

Stella Cho (Reuters): Hi, Governor Stella Cho from Reuters. I just want to follow up on Ainsley's question regarding the possibility of a July hike. Do you think the near term resolution of just in the Middle East with the reopening of the Strait of Hormuz might stop you from hiking in July or July is a done deal basically.

Anna Breman: The key thing for us is how we see the inflation outlook over the medium term. We expect even now there will be some supply disruptions that have been lasting for quite some time and that's likely to feed through. Our key focus is to very carefully read the data and see to what extent do we see indirect effect and then also potentially second round effect. So I think that even if the conflict stops, we are likely to see some of those effects feeding through over time and ultimately what we'll determine is how we see the likelihood of inflation falling back to target within a reasonable timeframe. I'll

Stella Cho (Reuters): Just have a quick follow-up question. So the Committee only has six Committee members currently and when can we see the appointment of a deputy governor that might break this tiebreak situation that we have.

Anna Breman: That's something that we will get back to when I have more information.

Jenny Ruth (Good Returns): Thank you, Jenny Ruth from Good Returns and Just The Business. My understanding is the way that the OCR works is to depress demand and get inflation back at a point where there's excessive demand. We've actually got the opposite problem at the moment, so why are we all fixated on when the first height's going to be?

Anna Breman: So we do see somewhat weaker demand than we expected in February. We do expect that to put downward pressure on inflation over the medium term, but we also see the cost pressures going in the other direction and that's why I stress that we're weighing the cost pressures risking pushing up medium term inflation against weaker demand than what is actually already tighter financial condition going in the other direction and exactly how firms and households respond will be very important in that. So when we get more information now over the coming weeks and months, we can make an assessment on whether weekly demand is enough to make sure that inflation's return quickly to target or whether the OCR hikes is also necessary. Currently, our assessment with this cost pressure that we are seeing is that we expect to hike the OCR at coming meetings.

Jenny Ruth (Good Returns): It sounds like you're not completely ruling out the possibility that you just hold.

Anna Breman: Well, I will never completely rule out anything because the global environment is highly uncertain and we also have alternative scenarios in this Monetary Policy Statement just to illustrate that the OCR, we might need to hike it more than in the central projections. We could also stay on hold if we see weaker demand really pushing down medium term inflation. So I will not rule out that, but our expectation is that we will hike the OCR at coming meetings.

Jonathan Milne (Newsroom): Jonathan Milne from Newsroom. I'm sorry, a bit of a procedural geek question here, but what rules or protocols did you employ in deciding how to cast your casting vote?

Anna Breman: So we have a very robust process where first we look at all the data we've had since over the past few months, we'll look at the forecast, we'll look at different alternative for monetary policy. Then we have a procedure where we anonymously have an idea on where we want monetary policy to go and then we have a discussion and then we do a similar exercise. And then the final decision is at the decision meeting, which was this morning at 9:00 AM.

Jonathan Milne (Newsroom): Sorry, just a quick follow up though, but in casting your casting vote, I know that Committee procedure is often that you vote with the status quo, that the casting vote is cast with the status quo. Is that the rule that you employ?

Anna Breman: So in this case, we had a formal vote this morning where I first asked who are in favour of a hike, who is in favour of a hold and that means that my vote will be the casting vote and I voted according to how I saw inflationary pressures going forward.

Zane Small (Stuff and ThreeNews): Thank you. Kia ora Governor, Zane Small from Stuff and Three News. So just going back to that point, so you had that casting vote. What made you so certain that it was the right move?

Anna Breman: Well, I think that we all recognise that we have an uncertain global environment currently, but as my Committee members, I looked at the upside risk to inflation and our main forecast. I also looked at growth and I made an assessment on how I see these two forces and it's stated in my introduction and is also in the record of the meetings.

Zane Small (Stuff and ThreeNews): Thank you. And just a follow-up. Is it frustrating for the Reserve Bank that interest rates have been going up despite the cash rate being kept on hold?

Anna Breman: I wouldn't say that it's frustrated, but it's noted and Paul and Karen and I, we did emphasise tighter financial condition weighing on growth going forward and dampening medium term inflationary pressures. I don't know if Paul or Karen would like to comment to you.

Karen Silk: Globally, most central banks are taking a bit more of a wait and see approach. Many economists share that view. At this point in time, markets are looking ahead from that and looking at future inflationary pressures and have therefore priced that in already. That feeds into near term wholesale rates and wholesale rates are a very key driver to what happens with retail rates. And so we've seen mortgage rates increase off the back of that rise in wholesale rates and that's being informed by what market expectations are. So the Governor's right, financial conditions have tightened already and that is one of the factors that also you need to take into consideration. So what's happening with the transmission of monetary policy already.

Bernard Hickey (The Kaka): Bernard Hickey for the Kaka. At the risk of sounding unpatriotic, does the Phillips curve still work? Because looking at your spare capacity chart 2.1, the difference between now and February is you've got much more spare capacity in the economy. Surely that means you should be cutting rates.

Anna Breman: We also have considerably higher cost pressures. That means that some firms will and we already know that pass on some of those costs to consumers. So we have to weigh the cost pressure against the weaker demand that we're also seeing and that is holding back some of those price hikes. So we do have both and that is what we're stressing. I don't know, Paul, if you'd like to comment.

Paul Conway: Yes, it does still work and we've got one of Bill Phillips' machines in the next room. It's a tendency in the data, but as the Governor said, the nature of this shock, loosely, it's a negative supply shock. So it's pushing output and inflation in different directions. So that tendency in the data consistent within the economy consistent with the Phillips curve has just sort of been, I don't know, pushed to the background given the nature of the shock, but it will reassert itself as the shock moves through the economy.

Bernard Hickey (The Kaka): Governor, last time central banks saw a supply shock, they decided to look through it. They joined team transition. Now they seem a little bit gun shy about doing the same thing. What's different this time around? Because on the face of it, you've still got a lot of companies and price setters who have a lot of market power and regardless of the different state of the demand in the economy from when we last saw this in 2022, they could just pump it straight through again.

Anna Breman: So I think that each shock we really have to consider it as a new shock and read it from the conditions that we have at this time. And I think since you citing numbers in the monetary policy report, I would also like to do that. If you look at the graph on inflation and on both headline and core inflation, it's on page 21, figure 214. You can see throughout history that sometimes we've had quite high peaks in headline inflation without core inflation increasing that much. And sometimes particularly in 22, 23, we got a huge increase in core inflation as well and currently there are some things that are similar to 2011 when we didn't, when inflation fell back really quickly. Some things are maybe similar to 22, 23, but there are always differences. And the Committee and with the help of our excellent staff, we look at all that kind of data and assess how do we view it right now.

Currently, what we're seeing in the inflation numbers is mainly fuel prices going up, but we only have data for the first quarter and some data for April. And then over the coming weeks and months, we will learn more and then we can make a continuous assessment. Weaker demand currently is likely to hold back, but you're also right that those cost pressures are there and some firms will have the ability to pass on cost and some will not. So in addition to all the forecasting and reading the data we're doing, we also follow, we do business visits, staff is doing that systematically we do outreach to also hear directly from firms. And that's why I showed you this graph that we do see cost pressures. Some firms expect to pass them on, some don't. And our assessment is that in the near term, we're likely to need some OCR hikes to push back on having the risk of inflation becoming embedded.

Karen Silk: In 2022, you got to remember also that the economy was performing well above its potential at that point in time. So the demand factors were very significant in the economy. So that supported the ability to pass price increases through, whereas the starting point this time is very different as you know, with significant spare capacity.

Paul Conway: So context matters and the fact that demand is weakened the economy now is pulling down on those medium term inflation pressures, consistent with the Phillips curve, circling back to your original question. It's alive and well.

Luke Malpass (The Post): Luke Malpass, The Post. Just following up on some of the demand pressures in the economy, obviously over the past two or three years, the bank has noted that obviously rates and insurance have been big drivers of costs. Just wondering if you could comment on how much pressure they're putting on at the moment and also more generally any other sectors that you're starting to see might be a bit of a hotspot as far as passing on price increases go, whether it's from the rise of fuel costs or other factors.

Anna Breman: Yeah. So importantly, when we say inflation becoming embedded, that's when we see more broad-based inflationary pressures. So many different types of price categories increasing in price. So if we see only insurers, for example, we would call that relative price increase. Insurance prices, we haven't focused a lot on that in this monetary policy round, but it's actually in the last financial stability report. We have quite a lot of information on insurance affordability. Currently, the insurance premiums, they've been rather volatile, but lately they haven't increased that much except from one sector which is health. So I refer to more granular data, you have it in the financial stability report.

Paul Conway: I think rates is still just listening to the radio the last few days, like rate and increases are still reasonably chunky. I think insurance has dropped out a little electricity is still doing its thing and administered prices as well, which we've commented on quite a bit in recent reviews are also reasonably elevated at the moment contributing to that non-tradables inflation. Our forecast for non-tradables inflation is a little bit up. Obviously most of the fuel price effects is coming through tradables inflation, but there is a little bit of spillover into non-tradables inflation and the other factors that you're talking about are still in there as well.

Gyles Beckford (Radio New Zealand): Gyles Beckford from Radio New Zealand. The previous two statements this year have put some emphasis on the economic recovery that was taking place and your desire not to stifle it, not to dampen it. I detect through this document and through the comments you've been talking about demand here that I know you have just one mandate, which is low inflation, but that now growth is a very much a secondary consideration. Is that right?

Anna Breman: So actually I'm going to quote ... So of course we consider what happens to overall growth and employment because it will also have an effect and according to the secondary mandate, we also focus on the volatility of output. So if we look at the record of the meetings, there is a sentence That refers to that and it says the Committee judges that this is a proportionate response to bring inflation back to target in a reasonable timeframe without creating unnecessary volatility in output. So that's just pointing out that our mandate is to bring inflation back to target, but we aim to avoid unnecessary volatility and output.

Gyles Beckford (Radio New Zealand): What would be the best present that Nicola Willis could give you in the budget tomorrow?

Anna Breman: The budget tomorrow will be presented by the Finance Minister tomorrow and I will wait and see what she says tomorrow.

Jenée Tibshraeny (The New Zealand Herald): Jenée from the Herald. Can people with mortgages and people with term deposits, can they expect the interest rates that they pay or receive to rise in coming weeks?

Anna Breman: So our forecast is that we will see average mortgage rates going up. So we've seen that average mortgage rate, we've seen tighter financial condition like Karen discussed, but now that we've seen wholesale interest rates and mortgage rates starting to increase, that will also flow through through the average in the stock. So we do expect to see that overcoming months. I don't know if you want to comment in more detail here.

Karen Silk: Obviously wholesale rates have a significant impact on what happens with retail rates and we do expect to see continuing migration through. So we've seen some pass through into retail rates already from the increase in wholesale rates. It usually transfers with a lag. So you could expect to see a bit more sitting in there. As the governor said, even based on where rates are today, the mortgage rates are today, we would expect to see over the next 12 months the average stock rate move from 4.9 I think is where we were in the March quarter up to around 5.3, 5.4% over the next 12 months. So yes, I would expect to see some pass through happening.

Jenée Tibshraeny (The New Zealand Herald): So I guess just given where retail rates are, do you see policy settings to be accommodative still or actually more balanced?

Anna Breman: So there are a number of ways that we need to separate out. So there's one thing is our policy rate compared to what we think is neutral. We have a wide range for the neutral rate and currently we are at just below the lower band of some sort of neutral rate. And that's also discussed in the record of meeting, a little bit how Committees see that. But in addition to that, we have wholesale market rate and financial conditions that have tightened. So when we look at different surveys, it's a little bit different across sectors. Some people say that it's a bit tighter already and some say that financial conditions are still a bit accommodative. But if you just look at the purest form, our OCR compare to the neutral, we're still a little bit on the accommodative side.

Paul McBeth (The Bottom Line): Paul McBeth from The Bottom Line. Governor, what confidence did the Committee have in the central forecasts and what sort of chance are you putting on the alternative scenarios given we're in such a very difficult time to look in the crystal ball?

Anna Breman: Well, it's a very good question and it's a difficult one. So we haven't put exact probabilities on the different scenarios. We discussed that if we look at the higher and the lower scenario, that spans quite a good range. But again, we can never assume that we could get in another world that's even outside of that scenario range, but we thought it was important for the centre of projection to be complimented with alternative scenarios just to show the uncertainty that we're facing.

Paul Conway: But we're very clear in the document, in the ROM and in the MPS that those alternative scenarios are just three of many different paths that the economy could take from here.

Tom Pullar-Strecker (The Post): Oh, thanks Tom Pullar-Strecker from the Post again. Just following up on Gyles question, was there any discussion of tomorrow's budget at the meeting? It's been suggested, for example, that we already know from the pre-budget statements that there's a little bit of net stimulus coming through from the CapEx changes. Was that or anything else in the budget, the topic of conversation?

Anna Breman: So of course we've seen that some of the things have been announced already, but I will refer you back to the key projection assumption on pages 51 to 54. On page 52, it says what we have as assumptions for our forecast in terms of government spending and expenditure. And that is based on the half-year economic and fiscal update, the hiatus from 2025 December and then we've updated with some more information on the December 25 quarter while we await the publication of the budget on the 28th of May. So the assumptions that we make is that we base it on decisions that we made. Of course, we follow everything that's going on, but it's not until the next forecast that we really incorporate when we have a decision on the budget presented tomorrow. I don't know if Paul or Karen would like to comment further.

Karen Silk: I think we'd probably say also that based on the publicly available information that we all have access today, there are bigger things out there for us to worry about offshore happening offshore when it comes to inflation and that the information we have today is not showing material impact at all when it comes to our outlook for inflation.

Jonathan Milne (Newsroom): Jonathan Milne from Newsroom again. I hope I'm not breaching any protocol myself here, but I have a question for the three external members or dissenting members, if any of them wish to answer, particularly for Carl Hansen, what indicators cause them to be particularly concerned about cost or inflationary pressures?

Anna Breman: Yeah. So in terms of the Committee, we had a discussion before the press conference and the Committee has agreed on my introductory notes and to refer to the record of the meetings for more detailed information. We have a new charter that encourages external members to take media, give speeches, participate in the outreach, but the system we set up is that that should be coordinated with the Reserve Bank and also announced on the Reserve Bank website before they talk to media. So I think after this meeting, you can contact Naomi and they can help set up these media requests.

Stella Cho (Reuters): Hi, Governor Stella again from Reuters. A very quick question. Can you confirm if it's the first time the tiebreaker has been used?

Anna Breman: That I don't have that top of my head. Yeah.

Jenny Ruth (Good Returns): Hi, Jenée sort of already asked my question, but one of my readers has contacted me saying that he thinks the consumer is missing from all this discussion. And what would you have to say to consumers already suffering from higher foetal costs and already higher interest rates?

Anna Breman: Yeah. So we do discuss the situation for New Zealand households and what we do see is that New Zealand households is a very challenging environment. Many are hurting. I did say in my presentations that we see that real income growth is weaker because of the conflict and we do expect unfortunately a weaker labour market. We do expect the labour market to start strengthening when we see inflation falling and we expect inflation to be back at target in the target midpoint already by the middle of next year. So we do expect real incomes to start growing from next year and the labour market to strengthen, but we do see that this is hurting households.

Bernard Hickey (The Kaka): Bernard Hickey here from Kaka again. Your forecast suggest unemployment of over 5% for four years running, including a couple of years of your forecasts. What do you say to that generation who've come out of school, tertiary education in the last couple of years, face another couple of years of this who will be scarred by this long period of a slack economy because of whatever, possibly too loose, too tight, whatever. What do you say to that scarred generation?

Anna Breman: Yeah, no, but it is true that we come into this period and we talk about that in the Monetary Policy Statement and we've had three years a week economic growth and then end of last year, beginning of this year, we were starting to see the recovery. It was still at an early stages, but we did actually, and the data we've had lately confirms that we saw a recovery at the early stage. So this year we actually saw employment growth as well and now with the global events, this is again, hurting and slowing down the economy. So it is a really tough situation in particular for younger people who have a weaker connection to the labour market. It's really important from our perspective that if we don't get inflation down, we will get inflation down, but if we saw persistence in inflation, that would mean that purchasing power would be weak for a long time. It would weaken the labour market. So bringing inflation back to target will mean that we will get purchasing power back, we will get better growth and we will get better labour market going forward. And that's what we can contribute with, but our focus is on bringing inflation back because that will get better growth in coming years.

Bernard Hickey (The Kaka): On the wealth effect, which seems to have been a factor in recent decades here, you're also forecasting lower house prices. How much of effect might the wealth effect play in further depressing or slowing the growth part of the economy?

Anna Breman: Yeah. No, but what we see and there's some graphs on that in the report is that we expect house price growth to be flatlined a little bit weak this year and then start picking up. And we do discuss to what extent that will affect consumption and growth in New Zealand. One of the effects that we're seeing is that we're seeing more first time home buyers actually getting into the market. We're seeing more affordability in the housing market over the medium term, but there is definitely an effect where it can slow down growth a little bit in the near term. I don't know, Paul, if you'd like to comment a bit further.

Paul Conway: I think it is a challenge for the New Zealand economy to be like that wealth effect that you refer to has been a source of growth for some time in the New Zealand economy. It hasn't been there the last few years. Our projections are that it won't be there over the next year before picking up as the governor's speaking about. And I think that is a challenge. What is the new growth model for the New Zealand economy if it's not the house price kicker coming?

Bernard Hickey (The Kaka): Just one final thing on higher interest rates flowing through into the consumer price index. When the monetary policy setup was set up, we took mortgage rates out of the CPI so that we didn't have the Reserve Bank chasing its tail if you like. But now we have electricity prices, rates, which do reflect higher interest rates passed through by the Commerce Commission and regulated price increases and councils seem quite keen on putting up rates because of our interest rates. So is there a risk here the Reserve Bank has a sort of pro-cyclical effect whenever it puts up interest rates? It actually creates more inflation.

Anna Breman: So there is always this effect where there's some goods or services that could be indexed to inflation and then that we know that that will follow through, but that's also why it's so important to look at different measures of inflation. So we look at core inflation quite a lot, as you can see that I'm stressing and we stressed it in April as well, because that takes out some of that volatility and it shows more of the underlying inflationary pressures that is more indicative where inflation is going. So we do set monetary policy to ensure that inflation get back to target. We will look at a range of indicators to get around these kind of issues that you mentioned.

Jenée Tibshraeny (The New Zealand Herald): Jenée Tibshraeny from the Herald. I just wanted to run a school of thought past you that I've had put to me that's perhaps a bit different to the commentators that we hear of domestically. This economist was of the view that the government's decision to keep its spending fairly tight has actually put the Reserve Bank in a more difficult position now because if you increase the OCR that sort of hurts the economy and in their view, there is enough spare capacity for the government to be able to support the economy a bit more. And while the traditional school of thought is, while it's good that government's not spending too much because we don't want inflation, you're putting interest rates up, we don't want inflation, their view is actually government could be doing a bit more and actually the government not doing more is making it harder for you because when you put interest rates up, that'll hurt people. That's a different view to what we often hear about. What's your perspective on that?

Anna Breman: Well, I think what I said in April is that fiscal policy and the decisions, that's for elected officials always really important and we're waiting to see what is in the budget. It's always true that high inflation will always hurt the most vulnerable households the most. So temporary targeted measures that support the highly, highly vulnerable doesn't tend to cause any issues with inflation going forward, but it's really for elected officials to make those decisions.

So I think that will be the last question. Thank you very much and we look forward to seeing you. As you know, we have a press conference at each monetary policy meeting. We do it online, but we'll see you back in July. Thank you so much.

Introductory statement by Governor Anna Breman

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Anna Breman:
Good afternoon, everyone. Welcome to the Reserve Bank April Monetary Policy Review. I'm Anna Breman, Reserve Bank Governor and Chair of our Monetary Policy Committee. I'm joined by fellow committee members, Karen Silk and Paul Conway. Our other MPC members, Hayley Gourley, Prasanna Gai, and Carl Hansen are also online. Over the next few minutes, I'll share some slides and I'll talk you through today's decision and our assessment of the inflation outlook. We then look forward to answering your questions.

Today, the Monetary Policy Committee agreed by consensus to hold the OCR at 2.25%. Since the February Monetary Policy Statement, events in the Middle East have materially altered the outlook and the balance of risk for inflation and economic growth in New Zealand. In the near term, inflation is expected to increase and the economic recovery to weaken. Today's decision to hold the OCR rate balances the risk of reacting too early to near term inflation that monetary policy cannot prevent with the benefits of responding preemptively to the risk of higher medium term inflation.

Importantly, the Committee is vigilant to any generalised medium term inflation pressure, and we stand ready to act decisively to return inflation to its 2% target midpoint over the medium term. Let me now turn to the basis for our decision.

Chart: Dubai oil prices

As you know, the conflict in the Middle East is leading to significant supply side disruption in the global economy. The supply of oil, gas, and other petrochemicals such as fertilisers flowing from the Middle East has been significantly reduced. This is likely to lead to higher inflation and weaker growth, particularly in countries heavily dependent on Middle East oil and gas. And this includes many of New Zealand's trading partners in Asia.

As you can see in this graph, the price of oil have increased substantially. As of yesterday, market pricing is consistent with the price of oil falling over coming quarters. However, oil prices are currently very volatile, and today we've had an announcement of a ceasefire in the Middle East, and that has caused the oil price to drop over the past few hours.

If we turn to financial markets, they have also been volatile over the past month.

Chart: Two-year swap rates

Globally, overall financial conditions have tightened. And as you can see in this graph, wholesale interest rates have increased in many countries, reflecting expectations of tighter monetary policy. And this includes New Zealand. As you can see here in New Zealand, mortgage rates have also increased, and this reduces the further stimulus that we expected in February from borrowers refixing at lower interest rates.

While financial conditions tightened overall, the New Zealand dollar has depreciated somewhat in trade weighted terms, but this is also consistent with broader moves in currency markets.

Chart: Headline inflation

So let's turn to inflation in New Zealand. Oil and gas products are critical inputs for many sectors in New Zealand, such as transport, agriculture, and packaging. So higher oil prices and disruptions to global supply chains will mean higher near term inflation.

We have updated our forecast from February. We currently project consumer prices to be 3% in the first quarter of this year and 4.2% in the second quarter.

But again, this forecast is highly uncertain and consumer prices in the second quarter could be both higher and lower than what we see in this forecast. We will update it at our next monetary policy meeting in May.

The Monetary Policy Committee's mandate is to look through near term inflation volatility and ensure that inflation returns to the 2% target midpoint over the medium term.

Chart: Headline and core inflation

So in this graph, you can also see core inflation and core inflation is a good guide to medium term inflation pressures. And as you can see, prior to the conflict, measures of core inflation were stable, albeit slightly above the 2% target midpoint. So ensuring that inflation returns to 2% of the medium term, it will require three things, that core inflation remains contained, that wage growth is modest, and that medium and long-term inflation expectations stay around 2%. And importantly, this will depend on the outlook for the labour market and for growth. So let us turn to the outlook for the labour marketing growth. As you know, prior to the conflict, the New Zealand economy was in the early stages of an economic recovery.

Chart: Production GDP

GDP growth in the December 25 quarter was 0.2%. That was somewhat lower than we expected, but high frequency indicators over January and February suggested that the recovery was actually gaining strength. In this graph, you see the Kiva GDP now forecast, and that was actually 0.6% currently for the first quarter. Looking forward, higher fuel cost and rising uncertainty are expecting to weaken the economic recovery in the near term. And I would like to acknowledge that this is challenging time for many New Zealand households and businesses. Spare capacity is now likely to persist for longer, dampening the ability of firm to pass on cost increases through higher prices, and that will then dampen inflation over the medium term. Unemployment and job insecurity are also still at high levels, and this dampened wage growth, but it also dampens medium-term inflation pressure.

Chart: ANZBO business inflation expectations and business confidence

Given the recency of the conflict, we currently don't have much data on the likely persistence of higher near term inflation or how much we expect the reduction in economic growth to be in the near term. But what we do have, such as the business outlook survey that you can see now on this slide, it's consistent with near term inflation expectation increasing. You see that in the blue line, but also with business sentiment falling over the recent week. And if you see the two dots here, the blue and the red dot, that's the last reading from the end of March. In addition to this, we've done our own business surveys and we have an engagement with businesses around the country, and that confirmed this view with higher inflation expectations for the near term and somewhat weaker growth. At our May monetary policy meeting, so next monetary policy meeting, we will have a full set of forecasts and more data indicating where inflation and the economy is heading.

So before we take questions, let me recap. Today, the Monetary Policy Committee has agreed by consensus to leave the OCR on hold at 2.25%. We remain vigilant to any generalised inflationary pressure, and we continue to monitor the economic recovery. We stand ready to act decisively to return inflation to 2% over the medium term. We now look forward to taking your questions.

Media questions

Naomi Mitchell:
Thank you, Governor. And thank you to the journalists on our Zoom call. If I could just ask you to please raise your hand and we'll turn to you shortly. First up, we'll go to Lucy from Reuters.

Media:
Oh, hold on. Can you hear me?

Anna Breman:
Yes.

Media:
Okay, great. Sorry. So first of all, you talked about a number of committee members discussing preemptively increasing the cash rate. When they discussed preemptive, was that a decision or a discussion around increasing the cash rate today, or was it preemptive as in that you want to increase it next month? What sort of timeframe is that preemptive in?

Anna Breman:
No. So in the record of the meetings, there is a discussion on different options that we were discussing, including whether we should act relatively early because we think that there could be higher medium term inflationary pressures. And some committee members stress that if we do a rate hike in the near term, like at today's meeting, May or July or so, that might mean that we don't have to do so many rate hikes going forward, but we also at the same time discuss the risk that that could dampen the weak economic growth that we're already seeing in the near term. So when we say that we balance these things, that is what we mean. We looked at preemptively trying to make sure that we don't see medium term inflationary pressures against the risk of that dampening already weak economic growth.

Media:
So it was discussed the possibility of increasing the cash rate today?

Anna Breman:
Yes, it was a discussion.

Media:
And secondly, we've had news of a ceasefire today. What does that mean for your inflation outlook? And is inflation already baked in or will this change your forecast from today if the ceasefire sticks?

Anna Breman:
Yeah. So we knew that we would get more information because there was a deadline announced for today. So we knew that the inflation forecast, and particularly for the second quarter, was highly uncertain. Oil prices falling today means that that inflation forecast of 4.2% for the second quarter could be on the higher side, but we've also seen a lot of volatility in oil prices. And if something happens, we could see oil prices staying above 100%. And then unfortunately there is also upside risk to that forecast. But if this persists and in oil prices now fall faster than the future prices we're indicating, then that forecast is actually on the higher side. That's correct.

Media:
Thank you.

Naomi Mitchell:
Thank you. We'll now hit to Zane Small from 3 News.

Media:
Kia ora Governor, you did touch on it there, but my question to you is, you've forecast 4.2% inflation rate in the June quarter, and I'm wondering if that is a conservative estimate or about as high as you think it could go?

Anna Breman:
No. So we try to be very clear on which assumptions we make to come up with that number, and it's really that we use that the current oil price and what that means for fuel prices in New Zealand and the future prices as of yesterday. So as of yesterday, assuming that outlook for oil prices and what that means for fuel prices in New Zealand, and also assuming that some of that will be passed on to higher transportation costs, airfares, and to a little extent, also to food prices, that is exactly what the 4.2% is based on. But as we've seen today, today oil prices fell quicker than the future market price. So if that persists, that is on the higher side. On the other hand, if oil prices rebound and go up to a higher level again, then it's on the low side. And that's why we stress that there is a lot of uncertainty with that forecast.

Media:
And does that take into account that consumers may be spending a lot less because prices are so much higher?

Anna Breman:
So we don't do any reweighting of the CPI weights. This is a little bit technical because the CPI weights don't change. So even if households consume less fuel in the near term and drive their cars less, and there is some data that points to that, that will not be accounted for in the official CPI numbers. And it doesn't take into account that there might be a downward pressure on other prices if household consume less of other goods and services. That's not taken into account in that number.

Karen Silk:
So while that talks to the near term, what you would expect to see that if you have conditions like that, consumer confidence is down, the economy is weaker. That would flow into the medium term inflation numbers and it would have a dampening effect on inflation over the medium term.

Naomi Mitchell:
Thanks. We'll now head to Ainsley Thompson from Bloomberg.

Media:
Hello. With your visits to businesses, have you had any intelligence of changes in price setting behaviour?

Anna Breman:
Well, that's a very important question. So we've done both business surveys and we also met a number of businesses around the country. This is anecdotal data, so I want to be a little bit careful. The main things that we hear is that quite a number of businesses are planning on hiking their prices. Some are saying that they will use temporary fuel surcharges. That means that those prices could be reverted if we see fuel prices coming back down. Some are saying that they would just hike their prices and some say that they cannot hike prices even if this year the costs go up because consumers are not accepting higher prices. So we see a range of different answers from different companies. And this is the kind of thing where we get more data and better information over the coming month. Thank you.

Naomi Mitchell:
Okay. Thanks. We'll now head to Jason Walls from One News.

Media:
Thank you very much for the opportunity and I'd like to commend you on doing these online press conferences as well. I think it's a really good move towards transparency. My question is about house prices and just what your forecasts are about what's happening with house prices at the moment and going forward.

Anna Breman:
So that's a good question. So we don't have a new house price forecast right now, but we'll come back to that in the May meeting. In February, we still expected a little bit of higher house prices this year. What we do know is that it differs across different parts of the country. And in May, again, we'll have better data to comment on the recent developments, but we don't have a new update today.

Paul Conway:
Can I just add to that? Of course. We're not publishing a full set of projections because this is a monetary policy review. When we put out a monetary policy statement, which is four times a year, we do publish a full set of projections, including for house prices. But this time we did something a little unusual in that we put out forecasts for CPI inflation in Q1 and Q2 this year, just given the interest and how sort of relevant it is to the current economics conversation.

Anna Breman:
Yes.

Paul Conway:
But it's not a normal thing for us to do, to put numbers like that out at an NPR.

Naomi Mitchell:
Thank you. We'll move to Bernard Hickey from the Kaka. Bernard, you're on mute.

Media:
Thank you very much, Governor. Could you firstly talk about how close the committee got to a hike today, given you've said it was considered? And also, if there are forecasts there about the potential path for the official cash rate and whether it was in line with or above or below where financial markets are currently forecasting, which is two rate hikes before the end of the year.

Anna Breman:
Yeah. So thank you for giving me the opportunity to clarify that. So we were not close to a rate hike today in any way. We discussed the possibility of whether a relatively early rate hike could mean that we needed to do fewer rate hikes if we saw risk to medium term inflation being higher, but there was definitely no discussion or strong advocates for hiking at today's meeting. On the contrary, there was consensus that we should hold the OCR at 2.25%. We don't present an OCR track at today's meeting. We don't usually do that when we have a monetary policy review. So we'll get back to that at our next meeting in May. And exactly like Paul Conway pointed out, that's when we have a full set of forecast, as we usually do at the monetary policy statements.

Media:
So you didn't have a little OCR track somewhere deep in the spreadsheet that you were keeping an eye

Paul Conway:
On? We do have a set of projections that we run internally for NPR to sort of, I don't know, anchor the conversation, but we don't publish those externally because it's a sort of working set of projections and to get it from there to something that we'd be comfortable publishing would take rounds and iterations so that the committee owns it. And we basically don't have time to do that for an NPR, but we have that in front of us as committee members.

Karen Silk:
We have a full set of data to inform that, are there? Exactly.

Paul Conway:
Exactly.

Media:
But financial market conditions have tightened, as you mentioned in your statement with the decision. Are you okay with that given that we're seeing people reducing trucking schedules and there's been quite a head to confidence?

Anna Breman:
No, but it's a very good question. So we did note that financial conditions have tightened and that has also been translated into higher mortgage rate, not as much as wholesale interest rate has gone up. And as I did point out here, that means that the OCR cuts that have been done, we expected that to provide a little bit more stimulus this year when households were refixing their mortgages. So overall, that is a little bit tighter financial conditions, and that's likely to damper somewhat near term economic growth. It's about 20 basis points up on the mortgage interest rate for households. We also know that the deposit rates have not gone up as much as the mortgage rates.

Media:
So in a way, it's helped you do some of your work.

Karen Silk:
Look at those rate movements, as the governor said, are a reflection of movements in the wholesale rates, and that's an interpretation of the disruption we've seen already and the increase in prices we've already seen in terms of oil products and byproducts from that, and the reflection that at least in the near term, that poses upside risk from an inflation perspective. So whether it goes further than that is largely dependent on what happens in terms of the duration of the disruption from here. So we've already talked about there being significant uncertainty around what will happen from here, and we would expect to have more clarity over the coming weeks, which will allow us to put a more fully informed set of forecasts out and an OCR track with that.

Anna Breman:
Thank you.

Naomi Mitchell:
Thanks, Bernard. We'll now head to Janae from the New Zealand Herald.

Media:
Hello. Bernard sort of touched on the question I had, and that was about how much of a bearing did the tighter financial conditions have on the committee's decision today?

Anna Breman:
Well, we did note that financial conditions have tightened. So we did take that into account at today's decision, but again, we're looking out over the medium term. So our decision is really based on where we see the economy and inflation heading over the medium term. And right now we see near term higher inflation, somewhat weaker growth momentum in the near term, and we're ready to act if we see that that means that it start being embedded in medium term inflation outlook, but we don't see that today. And we decided with full consensus to hold the OCR at today's decision.

Naomi Mitchell:
Thanks, Janae. We'll now head to Jonathan Milne from Newsroom.

Media:
Try that again. You're on mute. I'm Kara Govda from Auckland. Thank you for the opportunity to tip in from Auckland. There's been criticism of the MBIE fuel supply data and Stats NZ has admitted botching its FPI data in February and has now said that it's looking to improve some of its data collection, that survey data collection. How satisfied are you with the quality of the statistical information that you're getting in order to make your decisions?

Anna Breman:
Well, we are happy with the statistical information that we are getting. We also know that there has been some additional money to improve the statistic New Zealand data, and we welcome that. We are always, and it's always difficult in these circumstances when there is a lot of uncertainty. It takes quite a long time before we get the official statistics. So we're also stressing right now that we're looking very carefully at high frequency data. We're trying to be more active in terms of engaging with businesses, reaching out and doing business service, et cetera. But it's the way that it is when there's so much uncertainty in the global environment that we're all struggling in terms of getting access to the official data on time, but we're happy with the data that we do have when we get it.

Media:
Is it up to international standards?

Anna Breman:
I believe it is, yes. Thank you.

Naomi Mitchell:
Thank you. And if I could just remind our journalists on the call, if they could raise their hand. If they want to ask a question or an additional question, we'll now return to Lucy at Reuters.

Media:
Hi, you said that you were looking at raising rates gradually or could look at raising rates gradually. Do you want to just give us an idea of what gradually looks like and where you think the neutral rate is as of today?

Anna Breman:
So we have said previously that we believe that a neutral rate is ... It's a range with the midpoint closer to 3% and gradual means moving in normal step, which is usually 0.25%, but it could be at one meeting, it could be every second meeting. It will depend on the outlook for inflation and economic growth and how the labour market evolves. I don't know if Karen and Paul would like to add something on the neutral.

Paul Conway:
I'd just like to say, with the world being in such a state of flux currently and things moving so quickly, as the governor mentioned, with swings and oil prices today, I think the message that we're putting out in this MPR is the future path for the OCR is very conditional on how the economy evolves. And we've basically put out a framework for how we're thinking about near term inflationary pressures and the extent to which they spill over into medium term inflationary pressures, which is our target, and the extent to which that will be offset by a weaker growth environment in New Zealand, that'll very much condition the rate track going forward, but it is conditional. There are unknowns in that. And as Karen and the governor have said, we're getting more information all the time that'll make it less conditional come May in the first instance for our MPS.

Media:
Thank you.

Naomi Mitchell:
Thanks. We'll return to Ainsley from Bloomberg.

Media:
Thank you. As Bernard said, the markets are pricing in two rate hikes in the second half. Is that in line with your current thinking?

Anna Breman:
Well, as I mentioned, we don't have a new OCR track. So what we're saying, and we're trying to be very clear, which Paul described really nicely, is the kind of information that we're looking for over the coming months. So we're looking at, do we see any signs that medium-term inflationary pressure are increasing and would be outside of the 2% target? And we're looking at things like, is this affecting ... If headline inflation is spilling over into core inflation, we're looking at the medium and long-term inflation expectations, and we're looking at wage growth because we know that they tend to be good predictor of a medium-term inflation. So those are the things that are guiding us when we're looking at to whether or not we would need to hike rates or not.

Naomi Mitchell:
Thanks, Ansley. Now we'll head to Daniel O'Leary from Market News International.

Media:
Hi, thank you. I'm just wondering about the risk of stagflation development this year and what that could mean for the bank strategy.

Anna Breman:
It's a little bit hard to hear. Could you repeat it?

Paul Conway:
The risks of stagflation.

Media:
Stagflation risks.

Anna Breman:
Yeah. So our mandate is to make sure that medium-term inflation is close to target. So what we are saying today is, and I already just mentioned the things we are looking at, but we will act to ensure that medium-term inflation returns to target, and that will stop us from ending up in the risk of a stigflationary scenario.

Naomi Mitchell:
Thanks everyone for the questions. Just a reminder, you can raise your hand if you'd like to ask a question. Do we have any questions for the panel? I think that might be it. So I'll pass back to you, Governor. Thanks everyone. Thank you.

Anna Breman:
So thank you everyone for your questions and for joining us today. We intend to make this online media conference a standard feature after the monetary policy review, but we are open to evolving our approach and we welcome your feedback. But again, thank you so much for joining us today.