(Bloomberg) -- New Zealand’s central bank said there’s a risk that renewed inflation pressures could keep global interest rates high for longer.

“Global inflation is declining from elevated levels and financial markets have priced in lower policy rates over the next year,” the Reserve Bank said in its semi-annual Financial Stability Report Wednesday in Wellington. “However, there remains a risk that new or persistent inflation pressures could mean global interest rates remain restrictive for longer, placing continued pressure on households, businesses and the financial system.”

Inflation is proving harder to tame than expected, prompting investors to reduce bets on rate cuts this year in economies such as the US and New Zealand. The Federal Reserve meets this week in the wake of a recent report that showed its preferred gauge of underlying inflation rose at a brisk pace in March. 

The RBNZ has previously indicated is doesn’t plan to pivot to monetary easing until 2025. A measure of domestic inflation pressures was higher than it expected in the first quarter.

It said today that while labor market conditions continue to ease gradually, they remain tight in advanced economies including New Zealand. Supply chain pressures have also re-emerged in recent months with the disruption to global shipping, amid high geopolitical tensions.

The RBNZ noted that expectations for monetary policy easing have led to equity markets rallying in major economies.

“An abrupt reversal in sentiment arising from weaker-than-expected earnings or inflation remaining elevated could drag stock prices down, which would generate economic and financial risks from a market-driven tightening in financial conditions,” it said.

At the same time, the RBNZ said New Zealand’s financial system remains well placed to handle a range of severe scenarios. 

Banks’ capital ratios have increased ahead of higher future requirements and liquidity positions remain strong, it said. 

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