RBNZ signalled it will look through temporary energy-driven inflation but stands ready to hike rates if persistent price pressures threaten inflation expectations.Summary:RBNZ flags two-path outlook tied to Middle East-driven energy shockShort-lived spike → policymakers to look through petrol-driven inflationProlonged disruption → risk of higher inflation, weaker growth, tighter policyWarns second-round effects could require rate hikes to anchor expectationsFinancial stability risks noted via funding costs for NZ banksEmphasises monetary policy focus on medium-term inflation outlookFiscal policy seen as better tool for targeted household supportEconomy still below capacity, recovery remains early stageReserve Bank of New Zealand Governor Anna Breman said the central bank is prepared to look through a temporary rise in energy-driven inflation stemming from the Middle East conflict, but warned that a more persistent shock could require tighter monetary policy to prevent inflation from becoming entrenched.Speaking on Tuesday, Breman outlined a conditional policy framework centred on the duration and persistence of the energy shock. A short-lived disruption—manifesting through higher petrol prices—would not warrant a monetary policy response, provided it does not materially affect medium-term inflation or inflation expectations. In such a scenario, tightening policy would risk unnecessarily dampening economic activity without delivering meaningful benefits for near-term inflation outcomes.However, Breman stressed that a more protracted conflict could generate sustained cost pressures, raising the risk of second-round effects. If higher energy prices begin to feed into broader inflation or shift inflation expectations away from the central bank’s 2% target, the appropriate response could involve raising interest rates to maintain credibility and anchor expectations.She emphasised that monetary policy must remain forward-looking and focused on medium-term inflation dynamics, rather than reacting mechanically to short-term price shocks. The RBNZ stands ready to reassess the outlook and adjust its policy stance as new information emerges.Breman also highlighted broader risks stemming from the global backdrop, including the potential for financial stability pressures that could affect the cost and availability of funding for New Zealand banks. At the same time, she reiterated that monetary policy’s primary contribution to economic wellbeing is maintaining low and stable inflation, while fiscal policy is better suited to providing targeted support to vulnerable households.Despite these risks, Breman noted that New Zealand’s economic recovery remains in its early stages, with the economy still operating below capacity. This underscores the delicate balance policymakers face as they navigate the competing forces of inflation pressures and fragile growth momentum. This article was written by Eamonn Sheridan at investinglive.com.