RBNZ, RBA warn oil-driven inflation may force more rate hikes

Central banks in Australia and New Zealand on Tuesday flagged rising inflation risks driven by persistently high oil prices, with top officials from both institutions warning that further interest rate increases may be needed to contain price growth.

New Zealand: Oil Prices Cloud Inflation Outlook

Reserve Bank of New Zealand Governor Anna Breman said that if recent gains in oil prices persist, near-term inflation could come in above the central bank's September forecasts. "Recent increases in global oil prices and longer-term interest rates reflect the challenging environment we face," Breman said in a speech in Dunedin. "If higher oil prices persist, they are expected to result in somewhat higher near-term inflation than we assumed in the September statement."bloomberg+1

The RBNZ raised its cash rate by a quarter point to 2.75% at its September meeting but projected a more gradual tightening path than markets had anticipated. The central bank had forecast consumer price inflation would slow slightly to 3.9% in the September quarter from 4.1% the previous quarter. Breman noted that while the economic recovery is continuing, progress remains uneven, and "significant risks to the economic outlook remain." Markets now imply a 75% chance the RBNZ will raise rates again to 3% when it meets on October 28.wiky+1

Australia: Inflation Risks "May Be Materialising"

Across the Tasman, Reserve Bank of Australia Governor Michele Bullock struck a similarly hawkish tone, telling a business lunch that upside risks to inflation "may be materialising" given elevated energy prices and excess domestic demand. Core inflation in Australia is running at 3.6%, well above the RBA's 2% to 3% target range, and the board has already raised the cash rate by 75 basis points since February to a post-pandemic high of 4.35%.reuters

Bullock said unemployment in a range of 4.5% to 5.0% could help restrain inflation, suggesting some rise from the current 4.5% level may be needed. Earlier on Tuesday, RBA Assistant Governor Sarah Hunter reinforced the message, saying rates might have to rise for a fourth time this year to ensure inflation is reined in. "The risk to inflation is skewed to the upside," Hunter said, adding that if those risks materialise, the board would "definitely be considering whether or not they have to hike the cash rate."investing+1

Broader Central Bank Alignment

The warnings from the RBNZ and RBA came alongside hawkish signals from other major central banks. Boston Fed President Susan Collins told the Associated Press that the renewal of Middle East combat in August was a key reason she supported a quarter-point rate rise last week, and she has pencilled in a second hike this year. ECB Executive Board member Philip Lane said a second wave of energy price increases would push inflation higher before it declines toward target from mid-2027. Markets have priced in a 95% chance the RBA will hike to 4.60% when it meets on September 29.investinglive+1