New Zealand Reserve Bank's Chief Economist warns: Inflation may be more stubborn, there remains a risk of further interest rate hikes in the future.

New Zealand Reserve Bank Chief Economist Paul Conway said on Tuesday that the pace of decline in inflation in New Zealand may not be as fast as the central bank predicted, which means that interest rates could still be raised further in the future. The Reserve Bank of New Zealand lowered its third-quarter inflation expectation from 4.3% to 3.3% last week, primarily reflecting the impact of falling fuel prices after the temporary agreement between the United States and Iran. However, with recent conflicts erupting again in the Middle East, oil prices have rebounded. Conway said in a speech in Wellington, "I believe that the developments in the Middle East over the past week mean that there are upside risks to our third-quarter inflation forecast. If the inflation pressures from the Middle East conflict last longer than expected, we will respond." The Reserve Bank of New Zealand raised the Official Cash Rate (OCR) by 25 basis points to 2.5% last week, marking the first rate hike in three years. The central bank stated that this move is aimed at gradually withdrawing stimulus to the economy and ensuring that inflation returns to around the midpoint of the 1% to 3% target range next year. Policymakers are concerned that medium-term inflation could become entrenched, so they hope to gradually adjust the OCR to a neutral level. They also anticipate that the New Zealand economy will recover in the second half of 2026, which could further increase price pressures. Due to the hawkish signals from the Reserve Bank of New Zealand, along with a series of positive economic data, traders are betting that there will be two more rate hikes this year and are driving up the New Zealand dollar. Currently, investors expect the OCR to rise to 3% in December. The market also anticipates another rate hike in the first quarter of 2027. Conway stated, "Short-term inflation pressures seem to have eased, at least for now, which is undoubtedly a welcome development." "But the conflict in the Middle East continues to bring another significant inflation shock to the global economy and the New Zealand economy." The Reserve Bank of New Zealand believes that there is still enough spare capacity in the economy, making it harder for businesses to fully pass on cost increases to consumers. Conway added, "Spare capacity is expected to also dampen businesses' pricing decisions, making price-setting behavior more consistent with a low and stable inflation environment over time. Meanwhile, the less stimulative monetary policy will also reduce medium-term inflation pressures." However, a survey released by the New Zealand Institute of Economic Research (NZIER) on Tuesday showed that businesses still seem intent on continuing to raise prices. According to the Quarterly Survey of Business Opinion, 54% of businesses reported rising costs in the three months ending June, and 54% of businesses expect costs to continue increasing in the third quarter. The survey also showed that in the second quarter, 41% of businesses raised product prices, and 54% of businesses expect to continue raising prices in the current quarter. The survey covered over 800 businesses. Christina Leung, Deputy Chief Executive of NZIER, said, "We are indeed seeing indicators of costs and pricing on the rise. This suggests that inflation pressures in the New Zealand economy are building." Conway stated that although oil prices have fallen, the impact of this oil price shock will continue to transmit throughout the entire economy in the coming period. He stated, "When businesses can more easily pass on cost increases, inflation becomes more persistent." "And the longer inflation persists, the greater effort monetary policy must make to bring inflation back to target levels."