Middle East Conflict to Drive Higher Inflation & Weaker NZ Growth: RBNZ

New Zealand is bracing for a period of higher inflation and slower economic growth as the conflict in the Middle East continues to ripple through global markets. Reserve Bank Governor Anna Breman outlined the expected impacts in prepared remarks ahead of an address to Business NZ’s CEO Forum, warning that the effects are already being felt and will likely intensify in the coming months. The central bank is walking a tightrope, attempting to avoid overreacting to temporary price shocks while remaining vigilant against the risk of entrenched inflation.

Fuel Costs and Broader Price Pressures

The most immediate impact, Breman explained, will be felt at the pump. Petrol and diesel prices have already risen sharply, with the average price of 91 Octane reaching $3.29 per litre on Monday morning, compared to $2.50 in late February. These fuels represent approximately 4% of the Consumer Price Index (CPI), meaning even a modest increase in prices has a noticeable effect on overall inflation. Rising fuel costs are a key driver of the near-term inflationary pressure.

Though, the impact extends beyond direct fuel costs. Higher oil prices translate into increased transportation costs for a wide range of goods, and services. Breman cited rising airfares, driven by both higher fuel costs and disruptions to airport hubs in the Middle East, as an example. She noted that higher fertilizer prices – crucial for agricultural production – could accept up to nine months to fully impact supermarket prices, as autumn fertilizer requirements are already secured for New Zealand farmers. The northern hemisphere’s spring planting season, however, will see those higher costs pass through more quickly, potentially impacting New Zealand through global food prices.

Growth Dampened by Uncertainty and Trade Impacts

Beyond inflation, the conflict is expected to weigh on economic growth. Breman highlighted that higher production costs will likely squeeze margins for businesses and reduce real incomes for households, leading to decreased spending and investment. Reduced access to Middle Eastern markets for New Zealand exports, particularly dairy and meat products (which account for 4-5% of total goods and services exports), could similarly have a direct impact on firms.

Shipping disruptions and potential oil shortages add another layer of complexity, lengthening supply chains and hindering both imports and exports. Breman acknowledged that passenger travel disruptions, particularly in the aviation sector, will impact the tourism industry, although this could be partially offset if New Zealanders and Australians opt for domestic travel. Air New Zealand has already faced fuel-related challenges, leading to flight cuts, illustrating the vulnerability of the sector.

Navigating the Monetary Policy Response

The Reserve Bank faces a delicate balancing act. Breman emphasized the necessitate to avoid reacting prematurely to short-term inflationary pressures that monetary policy can’t easily address, while also guarding against allowing above-target inflation to become entrenched. The RBNZ’s primary mandate is price stability, and it intends to use its tools to ensure that a temporary spike in inflation doesn’t translate into lasting inflationary pressures.

Inflation in the December 2025 quarter was recorded at 3.1%, slightly above the RBNZ’s target band of 3%. However, core inflation has remained steadier at 2.4% for some time. Breman expressed confidence in the RBNZ’s ability to achieve its 2% target midpoint over the medium term, citing the early stages of economic recovery, well-anchored medium-term inflation expectations, and subdued wage growth.

The RBNZ is adopting a more transparent approach to its decision-making process. Starting with the April 8th Official Cash Rate (OCR) decision, the bank will follow the announcement with an online news conference, a practice that will become standard. This move is part of Governor Breman’s broader commitment to improve the central bank’s communication and transparency, as highlighted in recent announcements.

Financial Market Impacts and Global Conditions

The conflict’s impact isn’t limited to direct price effects. Breman noted that higher wholesale interest rates and lower equity prices are tightening global financial conditions, increasing borrowing costs for households and firms. This tightening could further dampen economic growth. The RBNZ will be closely monitoring these financial market developments as part of its overall assessment of the economic outlook.

The RBNZ acknowledges it is “at the early stages of an economic recovery” and will “gaze through” the first-round direct and indirect effects of the conflict when making its April 8th OCR decision. The committee will focus on assessing medium-term second-round effects and risks to inflation expectations.

Looking Ahead: Vigilance and Assessment

The Reserve Bank is well-positioned to manage the challenges posed by the Middle East conflict, according to a statement released on the RBNZ website. The RBNZ is actively assessing the evolving situation and its potential implications for the New Zealand economy.

Breman’s remarks signal a cautious approach, emphasizing the need for vigilance and a data-dependent response. The central bank will be closely monitoring a range of indicators, including inflation expectations, wage growth, and global commodity prices, to inform its future policy decisions. The April 8th OCR decision will be a key test of the RBNZ’s ability to navigate these challenging economic waters.