SYDNEY, March 24 (Reuters) – The head of New Zealand’s central bank said on Tuesday that monetary policy would look through a temporary spike in energy costs from the conflict in the Middle East but higher rates could be needed if inflation threatened to become entrenched.

Reserve Bank of New Zealand Governor Anna Breman said in a speech that the duration of any energy shock was important in balancing the risks of higher inflation against the drag on economic growth.

“A short-lived disruption and a temporary increase in petrol prices can – and should – be looked through from a monetary policy perspective if it is unlikely to have an impact on medium-term inflation outcomes,” said Breman, who took over as governor late last year.

“If there are effects on medium-term inflation or inflation expectations, the appropriate policy response could be to increase interest rates to prevent these second-round effects,” she added.

The central bank has cut interest rates sharply over the past couple of years, leaving them steady at 2.25% since November. Investors have recently wagered it would have to start tightening relatively soon to head off the inflationary pulse from higher energy costs.

Markets still see little chance of a hike at the RBNZ’s next meeting on April 8, but imply around a 60% chance it would lift the official cash rate by 25 basis points at its following May meeting. Rates are seen ending the year at 3.0%.

Breman said in her speech that households and businesses faced a time of uncertainty and potential hardship given the rise in energy costs, and targeted support from fiscal policy would be more effective than monetary policy in supporting the economy.

“Most importantly, monetary policy can and should ensure that a temporary inflation spike does not turn into enduring inflationary pressures,” she said. “The Committee will be vigilant to this risk.”

(Reporting by Wayne Cole and Renju Jose; Editing by Mark Porter and Chris Reese)