A challenging time for monetary policy
Inflation in Uncertain Times
I do feel for the Reserve Bank of New Zealand’s Monetary Policy Committee (MPC) right now. An oil-and-energy shock driven by conflict in the Middle East is pretty much the nightmare scenario for any central bank: It lifts prices and leans on growth at the same time.
Higher fuel and energy costs ripple through the whole economy. They raise transport and production costs, squeeze household budgets, and can cool spending—so growth weakens just as inflation lifts. That puts the MPC in a bind. Should they:
I do feel for the Reserve Bank of New Zealand’s Monetary Policy Committee (MPC) right now. An oil-and-energy shock driven by conflict in the Middle East is pretty much the nightmare scenario for any central bank: It lifts prices and leans on growth at the same time.
Higher fuel and energy costs ripple through the whole economy. They raise transport and production costs, squeeze household budgets, and can cool spending—so growth weakens just as inflation lifts. That puts the MPC in a bind. Should they:
- Tighten policy to lean against inflation, and you risk making an already-soft growth outlook worse.
- Ease policy to support growth, and you risk letting a “temporary” spike in inflation turn into something more persistent.
The MPC has been clear about the limits of what monetary policy can do. Governor Anna Breman has essentially said the Bank should avoid “reacting too early to near-term inflation pressures that monetary policy can do little about,” while also not reacting too late if above-target inflation becomes embedded. That’s the tightrope.
“Look through it”… but only if it stays temporary
You’ll hear the phrase “look through” a lot in New Zealand commentary. The logic is straightforward: the OCR can’t produce oil, and it can’t fix a shipping lane. A short-lived jump in petrol prices is painful, but hiking rates won’t bring petrol down next week.
Breman has spelled out the framework bluntly: a short-lived disruption and a temporary increase in petrol prices can—and should—be looked through if it’s unlikely to affect medium-term inflation. She also notes why: policy takes time to work (the biggest impact is 6–9 quarters out), so tightening into a short supply shock can simply “dampen growth without materially improving near-term inflation outcomes.”
That’s the friendly, common-sense version: don’t smash the economy to fix something that might fade on its own.
The catch: credibility is earned at home
But “look through it” only works cleanly when inflation expectations stay anchored—when businesses and households believe inflation will settle back near target.
The MPC’s own February 2026 statement highlights how geopolitical uncertainty can push oil prices up and make markets volatile, and how risk shocks can move the NZ dollar—affecting tradables inflation quickly. In other words: even when the shock comes from offshore, it can become a domestic inflation problem if the currency falls, or if businesses start embedding cost increases into prices and wages.
That’s why the MPC can’t just shrug and say, “not our problem.” The Reserve Bank’s job is to keep inflation between 1% and 3% over the medium term (with a focus on the 2% midpoint), and it must protect that credibility.
So, perhaps the real NZ version of “look through it” is:
“Look through it”… but only if it stays temporary
You’ll hear the phrase “look through” a lot in New Zealand commentary. The logic is straightforward: the OCR can’t produce oil, and it can’t fix a shipping lane. A short-lived jump in petrol prices is painful, but hiking rates won’t bring petrol down next week.
Breman has spelled out the framework bluntly: a short-lived disruption and a temporary increase in petrol prices can—and should—be looked through if it’s unlikely to affect medium-term inflation. She also notes why: policy takes time to work (the biggest impact is 6–9 quarters out), so tightening into a short supply shock can simply “dampen growth without materially improving near-term inflation outcomes.”
That’s the friendly, common-sense version: don’t smash the economy to fix something that might fade on its own.
The catch: credibility is earned at home
But “look through it” only works cleanly when inflation expectations stay anchored—when businesses and households believe inflation will settle back near target.
The MPC’s own February 2026 statement highlights how geopolitical uncertainty can push oil prices up and make markets volatile, and how risk shocks can move the NZ dollar—affecting tradables inflation quickly. In other words: even when the shock comes from offshore, it can become a domestic inflation problem if the currency falls, or if businesses start embedding cost increases into prices and wages.
That’s why the MPC can’t just shrug and say, “not our problem.” The Reserve Bank’s job is to keep inflation between 1% and 3% over the medium term (with a focus on the 2% midpoint), and it must protect that credibility.
So, perhaps the real NZ version of “look through it” is:
- Ignore the first-round petrol spike if it’s temporary, but
- be prepared to act if it starts triggering second-round effects—wage and price-setting behaviour that keeps inflation elevated. Breman is explicit: if the shock lasts and inflation expectations lift, the “appropriate policy response could be to increase interest rates” to prevent those second-round effects.
Where this leaves New Zealand in 2026
At the time of Breman’s remarks, the OCR is 2.25%, and the MPC is trying to balance a recovery with keeping inflation stable. The key judgement is duration:
- If the oil shock fades: the MPC can mostly look through it; growth is weaker, inflation lifts briefly, then settles.
- If it drags on: imported inflation sticks around, expectations lift, and the MPC may need to lean tighter even as growth slows.
In plain Kiwi terms: the Reserve Bank can live with a short-term spike, but it can’t let a spike turn into a habit.
The lesson for today
The lesson isn’t “central banks should always ignore oil shocks.” It’s that ignoring is only credible when the Bank is also clearly committed to keeping medium-term inflation under control. Monetary policy can’t fix oil supply, but it can stop an energy shock from turning into ongoing, economy-wide inflation. Or as Breman puts it, the Bank should avoid reacting too early to what it can’t control, while ensuring “a temporary inflation spike does not turn into enduring inflationary pressures.”
What long-term interest rates are telling us (since early March)
Since the start of March, long-term interest rates have moved materially higher, both in New Zealand and offshore. New Zealand’s 10-year government bond yield has lifted by roughly 40 basis points over the past month to around 4.7–4.8%, broadly in line with the repricing seen in the US and Australia. The move appears to reflect markets demanding a higher “risk premium” for uncertainty, and—at least in part—greater concern that the inflation impulse from energy and geopolitics could be more persistent than initially hoped. In NZ, the move has also been amplified by local credit/fiscal headlines, with yields spiking around 4.85% in late March alongside rising oil and a Fitch outlook change.
From a portfolio perspective, higher long-term yields are a reminder that duration risk matters in this environment. It supports maintaining high-quality bonds for resilience, while being thoughtful about the maturity profile (avoiding an unnecessary concentration in very long-dated exposures), and keeping diversification through assets such as infrastructure and gold where appropriate.
Disclaimer: This newsletter is meant to be informative and engaging, hopefully not a cure for insomnia. Please don’t take this as personalised financial advice. Discuss your situation with an Advisor. This is where I need to say past returns are no guarantee of future returns.
The lesson for today
The lesson isn’t “central banks should always ignore oil shocks.” It’s that ignoring is only credible when the Bank is also clearly committed to keeping medium-term inflation under control. Monetary policy can’t fix oil supply, but it can stop an energy shock from turning into ongoing, economy-wide inflation. Or as Breman puts it, the Bank should avoid reacting too early to what it can’t control, while ensuring “a temporary inflation spike does not turn into enduring inflationary pressures.”
What long-term interest rates are telling us (since early March)
Since the start of March, long-term interest rates have moved materially higher, both in New Zealand and offshore. New Zealand’s 10-year government bond yield has lifted by roughly 40 basis points over the past month to around 4.7–4.8%, broadly in line with the repricing seen in the US and Australia. The move appears to reflect markets demanding a higher “risk premium” for uncertainty, and—at least in part—greater concern that the inflation impulse from energy and geopolitics could be more persistent than initially hoped. In NZ, the move has also been amplified by local credit/fiscal headlines, with yields spiking around 4.85% in late March alongside rising oil and a Fitch outlook change.
From a portfolio perspective, higher long-term yields are a reminder that duration risk matters in this environment. It supports maintaining high-quality bonds for resilience, while being thoughtful about the maturity profile (avoiding an unnecessary concentration in very long-dated exposures), and keeping diversification through assets such as infrastructure and gold where appropriate.
Disclaimer: This newsletter is meant to be informative and engaging, hopefully not a cure for insomnia. Please don’t take this as personalised financial advice. Discuss your situation with an Advisor. This is where I need to say past returns are no guarantee of future returns.
