RBNZ's Breman flags firmer near-term inflation on oil prices

Breman's remarks indicate a central bank that is mindful of a real upside inflation risk stemming from oil, though without locking in a specific policy move ahead of October and thereby preserving flexibility rather than telegraphing an action in advance. For the kiwi dollar, the admission that inflation could land somewhat above what the September Monetary Policy Statement pencilled in is a mildly hawkish signal, but that is tempered by Breman's concurrent focus on an economy that is recovering unevenly, which argues against interpreting this as a clear precursor to an imminent hike. Markets had already factored in a hold at the October gathering following the previous month's increase to 2.75%, and these comments do not appear to disturb that expectation, even if the specific mention of oil as an upside inflation risk keeps energy costs front and centre as a potential swing factor for the RBNZ's next decision.

--

Breman notes that oil is currently lifting New Zealand's inflation trajectory above what the RBNZ projected only weeks earlier, even as the ongoing recovery advances at an uneven clip.

Summary:

• RBNZ Governor Anna Breman stated that should oil prices remain elevated, they are likely to produce slightly higher near-term inflation than projected in the September Statement.
• Breman indicated that the Bank will evaluate incoming data and international developments before its October decision, keeping its focus on the inflation outlook.
• She noted that major risks to the economic outlook persist.
• Breman said the RBNZ anticipates the economic recovery will gain strength and broaden over time.
• She stated that current data point to a continuing recovery in the current quarter, though it remains uneven.

On Monday, Reserve Bank of New Zealand Governor Anna Breman said that if oil prices stay higher for longer, near-term inflation is likely to run somewhat above the level projected in the Bank's September Monetary Policy Statement. These remarks inject an updated consideration into the RBNZ's inflation assessment a little over a month before its next scheduled meeting, all without tying the Bank to a defined policy action.

Breman said the RBNZ will look at incoming data and global conditions ahead of its October 28 decision, restating that the Committee keeps its attention fixed on the inflation outlook. She also said considerable risks to the economic outlook persist, a description in line with the RBNZ's recent statements that acknowledge both upside inflation pressures connected to energy costs and downside risks to activity coming from weaker domestic demand.

On the growth front, Breman said the Bank projects the economic recovery to strengthen and expand across coming quarters. She added that recent data indicate the recovery is ongoing in the current quarter, albeit unevenly across different sectors. Taken together, her comments paint a picture of a central bank weighing a firmer near-term inflation outlook, driven in particular by oil, against a recovery that is advancing but has yet to become broad based — a mix that leaves the timing and size of any additional policy tightening dependent on how both elements develop in the weeks ahead.

These remarks come after the RBNZ's September 2 decision to raise the Official Cash Rate by 25 basis points to 2.75%, its second consecutive increase since resuming its tightening path in July. That move reflected disagreement within the Committee over the risk balance, as most members flagged upside inflation pressures tied to persistent energy costs and the chance that businesses could pass on higher expenses more widely, while others emphasised downside risks coming from soft domestic demand. Market pricing generally points to an October pause before any subsequent move later in the year, and Breman's latest comments on oil and inflation add a new, though not yet conclusive, element to that outlook ahead of the Bank's next gathering.