The Reserve Bank (RBNZ) has held the official cash rate (OCR) unchanged at 2.25% in a split vote, but warned it will have to raise to counter surging inflation caused by the Middle East conflict.
The Monetary Policy Committee's (MPC) three external members wanted a 25 basis point rise, while the three RBNZ members wanted to hold. Governor Anna Breman, as the chair, used her casting vote to hold.
"All committee members agreed that the central projection for the OCR was appropriate and a good reflection of the trade-offs currently faced. However, members differed in their preferred timing for the initial increase in the OCR," the committee said in a statement.
Breman was joined by RBNZ assistant governor Karen Silk, and chief economist Paul Conway in deciding that for the time being medium term inflation pressures were contained and likely to return to the target band.
However, the three external members - Carl Hansen, Hayley Gourley, Prasanna Gai - believed the current OCR rate was too low and an increase was needed now to damped any spread of inflation pressures through the economy, and into prices and wages.
Analysts had forecast no change to the OCR, but some said a strong case could be made for the RBNZ to raise now to lessen the longer term impact of inflation on households and businesses.
Ready to act
The MPC said getting inflation back into the 1-3% target zone remained its priority and higher interest rates would be needed to achieve that this year.
"The pace of OCR increases will depend on the relative influence of persistent wage- and price-setting behaviour versus weaker economic activity on medium-term inflation pressures."
An indicative interest rate track pointed to a likely OCR rise in September to 2.5% and a further 25 basis point rise, and a further rise in early 2027 before a couple more increases over the following 12 months.
Inflation was forecast to hit 4.3% in the September quarter, before returning to the target band by the middle of next year.
But the MPC said there was much uncertainty but generally conditions would be weaker in the near term.
"Near-term economic activity is likely to be weaker... because of the Middle East conflict. Higher fuel prices are increasing costs, lowering profit margins for many businesses, and reducing real incomes and household purchasing power."
However, it was assuming that growth would start to recover towards the end of the year.
BNZ head of research Stephen Toplis said he expected a solid pace of OCR rises starting mid-year.
"We bring forward our first rate hike to July with rate increases now pencilled in for every meeting until we reach the peak of 4.0% ... in May 2027."
