Westpac flags tough outlook as Gulf conflict stokes inflation pressures
New Zealand borrowers are staring down a longer stretch of elevated mortgage rates after Westpac economists warned that the Gulf conflict’s inflation shock is forcing the RBNZ to keep a tightening bias.
Westpac Group chief economist Luci Ellis (pictured left) stresses that “forecasts are an assessment of the most likely outcome, not the preferred one.” For advisers and their clients, that “most likely” path now involves stickier inflation, higher mortgage rates, and weaker borrowing capacity than many had hoped.
Ellis argues the latest disruption to global oil and gas supply is unlike recent shocks, pushing up fuel and freight costs and flowing through into construction and goods prices. Westpac estimates the cost of building a detached home has already risen sharply, further squeezing first‑home buyers and renovators and limiting how far loan sizes can stretch.
While a hastily arranged ceasefire in the Strait of Hormuz has taken some immediate risk premium out of oil markets, Kelly Eckhold (pictured right), Westpac chief economist NZ notes that tanker flows from the Persian Gulf have not meaningfully increased, leaving New Zealand’s medium‑term fuel security – and the inflation risk it poses – essentially unchanged despite calmer headlines.
Hawkish RBNZ keeps OCR hike risk alive
Eckhold notes that “The Reserve Bank delivered a hawkish hold in their Monetary Policy Review this week.” He describes the backdrop as one where markets are grappling with “the prospects of a long bumpy road ahead” rather than a quick resolution to the Iran conflict.
That uncertainty, coupled with the risk of longer‑lived inflationary impacts, has pushed the RBNZ away from the more relaxed tone Governor Breman struck only weeks earlier.
Eckhold says the Monetary Policy Committee appears split into two camps: a more hawkish group prepared to move proactively, and a more cautious camp that would prefer to see more of the growth hit from higher oil prices before lifting the OCR. Yet, as he points out, “the issue for the MPC is when, not if, to tighten.”
Westpac has brought forward its OCR profile, now expecting rate hikes to begin around September, with steady 25‑basis‑point moves taking the cash rate into the neutral zone near 3.5% and ultimately peaking around 4.25% in 2027–28 before easing back later in the decade. For borrowers, that implies an extended period where mortgage rates remain elevated and the risk of further increases lingers.
Resilient PMI complicates the picture
At the same time, recent high‑frequency indicators suggest the New Zealand economy entered the war in better shape than feared.
Eckhold has highlighted that the latest PMI was hawkish hold‑consistent, with activity only modestly softer despite the surge in fuel costs.
He also points to a resilient Heavy Traffic Index and weekly filled jobs tracking close to year‑earlier levels, indicating that businesses have not yet begun large‑scale job shedding in response to higher energy prices.
Looking ahead, Eckhold sees upcoming data on services activity, migration, house sales, monthly prices and retail spending – including how sharply fuel and airfares spill over into other categories – as crucial for judging how persistent inflation pressures will be.
For more insights, read this Westpac report.
Stay informed with the latest housing market trends and mortgage insights — subscribe to our free daily newsletter.
