Fuel surge dents spending, stokes pressure for OCR increases
New Zealand mortgage advisers face a tougher backdrop as the Iran war and higher oil prices ripple through business costs, inflation, and the interest rate outlook.
Westpac NZ senior economist Satish Ranchhod (pictured) says the bank’s latest round of meetings with businesses was held firmly “in the shadow of the Middle East war.”
Before the conflict escalated, activity was starting to firm, but “the past month has seen a stark rise in cost pressures and uncertainty.” Transport, construction, forestry, agriculture and food processors are all reporting sharply higher diesel and bunker fuel costs, with complex pricing agreements and soft demand limiting how much can be passed on.
At the same time, supply‑chain risks have escalated as shipping insurance and fertiliser imports are disrupted, and forestry operators warn that harvesting may become uneconomic for smaller crews. Tourism businesses are seeing cancellations as fuel‑driven airfares rise, while retailers report weakening discretionary spending as households divert more income to fuel and essentials.
Confidence knock keeps businesses cautious
Ranchhod reports that many firms now view fuel “not just as a cost risk, but as a potential constraint on economic activity if elevated prices persist.” In response, businesses are delaying orders, cutting production, planning for worst‑case inventory needs and focusing on cash preservation rather than expansion.
That weaker activity backdrop is feeding into the interest rate outlook.
Chief economist Kelly Eckhold notes that “the issue for the MPC is when, not if, to tighten,” with Westpac now forecasting a series of 25‑point hikes from late 2026 that would eventually take the OCR towards 4.25% before easing later in the decade.
In its Weekly Economic Commentary, Westpac reiterated that view, highlighting that the oil shock is likely to keep inflation above the middle of the 1–3% target band through 2026 and justifying a higher‑for‑longer stance on interest rates.
See the latest Westpac insights for more information.
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