Middle East conflict drives fuel surge, delays rate-cut hopes for NZ
The Iran war is set to push New Zealand inflation higher and keep interest rates elevated for longer, according to new Infometrics forecasts.
The consultancy expects higher fuel prices to lift annual inflation to 4.8% this quarter, well above the Reserve Bank’s (RBNZ) 1–3% target band.
Even assuming fuel costs ease later in 2026, Infometrics projects consumer price inflation at 3.9% in March 2027 and 3.0% by December 2027, as second‑round effects ripple through the economy.
“Inflation expectations are more elevated than they were at any time during the 2010s, and the 2021‑23 experience of less pricing discipline is still fresh in business‑people’s minds,” Chief forecaster Gareth Kiernan (pictured) said.
“We’re also conscious that, after three years of weak demand conditions, firms have limited scope to absorb current cost increases. In general, we expect firms to try and raise prices despite the risk of losing customers, because the alternative of holding prices will makes firms unprofitable and effectively guarantee their own demise.”
Infometrics now expects RBNZ to raise the official cash rate (OCR) three times from July, taking it to 4% by mid‑2027 and as high as 4.5% in the first half of 2028.
Banks see Q1 softness giving way to sharper rises
Major bank forecasts for the March quarter CPI tell a similar story.
Westpac estimates New Zealand consumer prices rose 0.7% in the March quarter, with annual inflation dipping to 2.8%, but describes this as a “calm-ish before the storm” as the oil shock feeds through. The bank expects inflation to rise to around 4.3% by mid‑year, driven by higher food and petrol costs and still‑firm core inflation.
ASB’s latest CPI preview puts Q1 inflation at 0.8% quarter‑on‑quarter and 2.9% year‑on‑year, slightly above the RBNZ’s February track, and warns that inflation is likely to sit “uncomfortably” above the 2% midpoint through 2026, with its OCR profile now peaking around 3.25% by early 2028.
Kiwibank economist Alexandra Turcu says “We’re expecting a chunky 0.9% over the first quarter, keeping the annual rate at 3.1%.” She notes that only about one‑sixth of Q1 captured the fuel spike and that “The June quarter is when the true impact will be felt.”
Growth downgrade underscores stagflation risk
Infometrics has downgraded its 2026 GDP growth forecast from 2.5% to 1.3%, citing weaker household spending and the drag from higher fuel and borrowing costs. The firm expects household spending growth of just 0.8% this year, two percentage points below its pre‑conflict projection, as higher prices and rising mortgage rates erode real incomes.
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