Reserve Bank of New Zealand [RBNZ] Governor, Anna Breman, has warned that “inflation will be higher” and the central bank could “increase interest rates” if war in the Middle East drags on.
However, the Reserve Bank of New Zealand (RBNZ) is well positioned to handle the challenges to our price stability and financial stability mandates caused by the ongoing conflict in the Middle East, Governor Breman said in a speech published on March 24.
“We are likely to see higher headline inflation over the near term, and somewhat weaker growth momentum,” she says.
In the speech, Global shockwaves to Kiwi shores: The impact of the Iran conflict on New Zealand, Governor Breman acknowledged the uncertainty and hardship that many households and firms are experiencing at this difficult time.
“There is a risk that global financial stability risks could emerge and affect the cost and availability of funding for New Zealand banks. However, recent stress testing suggests that banks are resilient with strong capital and liquidity buffers, and are well-placed to weather severe geopolitical shocks.”
Governor Breman also set out the framework that the Monetary Policy Committee (MPC) will use to assess the appropriate monetary policy response to the effects of the conflict in the Middle East on New Zealand’s economy.
“Getting this judgement right is key to avoiding reacting too early to near-term inflation pressures that monetary policy can do little about – or reacting too late if above-target inflation becomes embedded in the economy,” Governor Breman says.
“Most importantly, monetary policy can and should ensure that a temporary inflation spike does not turn into enduring inflationary pressures. The Committee will be vigilant to this risk. “The best contribution that monetary policy can make to the wellbeing of New Zealanders is to deliver low and stable inflation over the medium term.”
Kiwibank economists Jarrod Kerr and Sabrina Delgado, writing for Kiwi Economics, say they heard a “balanced” commentary that emphasised the need to take time to assess.
“So immediate hikes (as priced in wholesale rates) are highly unlikely. We need more information around the duration of the war, and the flow through on prices and activity before adjusting policy,” they say.
“Breman’s speech highlighted three types of impacts to watch. Firstly, it’s the first-round direct effects of an immediate change in prices. Secondly, the first-round indirect effects. Finally, the second-round effects arising from changes in medium-term inflation expectations and the growth outlook. All of these take time to assess.
“In our opinion, with so much slack in the economy, we are unlikely to see the full pass-through into price and wage settings. We champion no moves in RBNZ policy. And wholesale markets, although stepping in the right direction, are still out of whack.”
The war in the Middle East is wreaking havoc on global economies and threatening kiwi inflation and growth, they say. If the conflict proves brief, any increase in petrol prices is likely to be temporary and shouldn’t affect the medium-term outlook.
Responding aggressively to a short, sharp shock would be an overreaction; one that risks slowing growth without meaningfully easing current inflation pressures. The bigger concern is avoiding a slide back into recession, just as the economy has only just begun to recover.
The April 8Monetary Policy Review will be crucial for resetting expectations for the remainder of 2026. In the meantime, the RBNZ update was a positive step, they say, as wholesale interest rates have edged lower, though not by much.
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