Reserve Bank holds official cash rate at 2.25%

• The Reserve Bank holds the official cash rate unchanged at 2.25 percent
• Monetary committee says Middle East conflict raises inflation, dampens growth
• Focus on keeping inflation expectations in check and low inflation in medium term
• RBNZ says balancing between quick action on inflation and not hurting recovery
• RBNZ warns of "decisive and timely OCR increases" if necessary

The Reserve Bank (RBNZ) has held its benchmark official cash rate (OCR) unchanged at 2.25 percent, as it forecast inflation to break above 4 percent but said it did not want to hurt the economic recovery.

The decision was expected and the central bank emphasised it was looking for the likely medium-term effect of higher inflation and reduced growth caused by the war, and household and business behaviour.

"The Committee's decision to hold the OCR balances the potential benefits of responding pre-emptively to the risk of higher medium-term inflation against the cost of unnecessarily stifling the economic recovery," the Monetary Policy Committee (MPC) said in a statement.

It said it expected inflation at 3 percent for the first three months ended March from 3.1 percent at the end of last year, rising to 4.2 percent in the June quarter.

The MPC said economic growth would fall as a result of the war while prices have already risen.

"Higher fuel prices are increasing costs, lowering profit margins for many businesses, and reducing household purchasing power. Increased global uncertainty is also expected to weigh on investment."

It's all about inflation expectations

The MPC emphasised that it was taking a medium-term view to getting inflation back to the 2 percent midpoint in the target band, with the key to policy being inflation expectations.

"The extent to which these criteria are met will influence the scope for the Committee to look through current near-term inflation or whether tighter monetary policy is required."

It said it was willing to look through a near-term inflation spike, which would allow a more gradual increase in the OCR.

"However, any signs of significant second-round inflationary effects or increases in medium-term inflation expectations would require decisive and timely increases in the OCR to re-anchor inflation expectations. The Committee is vigilant to these risks."

The monetary policy statement in February pointed to an OCR rise most likely early next year, but financial markets have priced in at least two quarter percentage point rises to 2.75 percent by the end of the year.