The country's biggest bank is forecasting annual inflation to get even higher as the war in Ukraine sends commodity prices skyrocketing.

The ANZ bank said it now expects annual headline inflation will peak at 7.4 percent in the second quarter of this year.

It previously forecast a peak of 6.4 percent in the first quarter.

It comes as Global Dairy Trade prices reached a record high, and the price of oil surged to levels not seen since 2008.

ANZ said the events in Ukraine were reverberating around the world.

"On the economics side, New Zealand's biggest exposure to the crisis is largely through the price channel.

"Commodity prices have been rising steadily over the past year as rising global demand struggled against Covid disruption, but with the outbreak of war and implementation of sanctions against Russia, those increases have turned vertical."

It said futures prices for key commodities have also surged.

Dubai oil price futures were above US$120 a barrel, with volatility at extreme, coupled with rising food prices.

"As a small open economy, New Zealand is exposed to global fluctuations in commodity prices.

"The most obvious impact for many consumers is through petrol prices," the bank said.

It said the visibility of petrol prices for consumers was one reason for the Reserve Bank to be concerned.

On the upside, ANZ said the labour market was "incredibly tight" and was likely to tighten further over the course of 2022.

But the mismatch between domestic labour supply and demand meant a considerable amount of domestic inflation would come from the labour market.

"And if the war for talent really starts to heat up, then wages could rise in a way that we just haven't seen this side of the year 2000."

Bigger rate hikes on the cards

ANZ has also revised its Official Cash Rate (OCR) forecast, and is now expecting back-to-back 50 basis point hikes in April and May - taking the OCR to 2 percent.

It now forecast the OCR hitting a peak of 3.5 percent in April 2023, up from the previous forecast of 3 percent.

"It's really not long since the February MPS [Monetary Policy Statement] but things have moved fast."

The changes for the OCR forecast came on the back of the updated inflation forecasts.

It also comes on the back of comments in the most recent OCR decision, in which the Reserve Bank's Monetary Policy Committee said it was willing to move rates in larger increments if required.

"The committee could choose to wait until the release of CPI [Consumers Price Index] between the April review and the May Monetary Policy Statement to deliver a 50 basis-point hike. But we know about the rise in oil prices now," ANZ said.

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