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

New Zealand Braces for Inflation, Slowed Growth Amidst Middle East Conflict

New Zealand’s economic outlook has been revised downwards as the conflict in the Middle East continues to send ripples through global supply chains, prompting the Reserve Bank of New Zealand (RBNZ) to anticipate higher inflation and weaker growth in the near term. Governor Anna Breman cautioned that the full effects of the escalating tensions are yet to be felt, but are already creating “shock” waves.

Speaking ahead of an address to Business NZ’s CEO Forum, Breman warned that headline inflation is likely to rise, while economic growth momentum will slow. The RBNZ acknowledges the hardship already being experienced by households and firms, and is carefully navigating a path to avoid overreacting to temporary pressures while remaining vigilant against entrenched inflation. The December 2025 quarter saw annual CPI inflation reach 3.1 percent, exceeding the RBNZ’s target range for the first time in over a year.

The primary driver of this anticipated inflation stems from disruptions to global oil flows. The Middle East, particularly the Strait of Hormuz – handling roughly one-fifth of global oil – is experiencing increased instability, leading to tanker route disruptions, increased insurance premiums, and rerouting costs. Brent crude has already surpassed critical thresholds, erasing gains made after 2025. New Zealand, as a net energy importer, is particularly vulnerable to these external shocks.

Specifically, Breman highlighted the direct impact on fuel prices. As of Monday morning, the average price of 91 octane petrol in New Zealand was $3.29 per litre, a significant jump from $2.50 in late February. Beyond the immediate impact at the pump, higher oil prices are expected to have broader effects, increasing costs across various industries, including airfares – impacted both by fuel costs and airport closures in the region – and potentially, fertilizer prices, which could take up to nine months to fully translate into higher food prices at the supermarket.

While acknowledging the current inflation rate of 3.1 percent, Breman noted that core inflation has remained relatively stable at 2.4 percent. The RBNZ believes it has the tools to steer inflation back towards the 2 percent midpoint over the medium term, but stresses the need to avoid premature reactions to short-term pressures that monetary policy can’t readily address. The upcoming OCR decision on April 8 will focus on assessing second-round effects and risks to inflation expectations.

The impact extends beyond prices. Reduced access to Middle Eastern markets for New Zealand exports, primarily dairy and meat products (representing 4-5% of total goods and services exports), could also weigh on economic growth. Disruptions to shipping and potential shortages could lengthen production times and hinder export capabilities. Passenger travel disruptions are anticipated to impact the tourism sector, although this could be partially offset by increased domestic and trans-Tasman travel.

Breman also pointed to tightening global financial conditions, driven by higher wholesale interest rates and lower equity prices, as contributing to the expected slowdown. Rising uncertainty is expected to dampen both business investment and household spending, mirroring patterns observed in the past when global trade policy uncertainty increased. The RBNZ anticipates that New Zealand’s economic growth in 2026 will be somewhat weaker than previously forecast.