Mr Conway noted that "near-term inflation pressures have eased as oil prices have fallen, reflecting some progress towards resolution in the Middle East. But the conflict has still delivered another significant inflation shock and the challenge for monetary policy is to ensure that this doesn't lead to persistent inflation."
Drawing on recent RBNZ research released alongside the speech, Mr Conway discussed how oil price shocks can flow through to broader inflation via firms' pricing decisions and the expectations of businesses and households.
"When inflation is high, people pay closer attention. Research suggests that New Zealand businesses pass on cost increases more readily now than in the past and are less likely to reduce prices when costs ease. All else equal, this raises the risk that temporary shocks becoming persistent inflation."
"If above-target inflation changes expectations and price-setting behaviour, monetary policy may need to respond more firmly to re-anchor inflation expectations. Encouragingly, medium-term inflation expectations are currently well anchored. Spare capacity in the economy should help limit pass-through. But after a prolonged period of above-target inflation, anchored inflation expectations cannot be taken for granted."
Last week, the Monetary Policy Committee noted that with inflation still above target and economic activity expected to strengthen, some further reduction in monetary stimulus is likely to be required. Future OCR decisions will depend on how incoming data, price-setting behaviour, and the strength of economic activity affect medium-term inflation pressures.
More information
- Download the speech and presentation slides
- Price-setting behaviour in New Zealand
- Evaluating measures of price-setting behaviour: new evidence for New Zealand
- July Monetary Policy Review and OCR
