Breaking: Government to provide $50 a week in fuel support! Reserve Bank Governor warns of rising inflation and weaker growth as several banks raise interest rates!
A conflict in the Middle East is rapidly developing into a chain of shocks for New Zealand’s economy.
A conflict in the Middle East is rapidly developing into a chain of shocks for New Zealand’s economy.
Speaking in Auckland today, Reserve Bank of New Zealand Governor Anna Breman said escalating tensions in the Middle East and rising international oil prices mean New Zealand is likely to face the twin pressures of renewed inflation and slower economic growth over the coming quarters. She also warned that if the oil price shock spreads further and pushes up medium-term inflation expectations, the Bank could respond by raising interest rates.
This is the Bank’s latest policy signal ahead of its Official Cash Rate (OCR) announcement on 8 April.
Meanwhile, the Government has announced a fuel crisis support package.
Nearly 150,000 households to receive NZ$50 a week
With international developments pushing up fuel prices and living costs, the Government has announced a fuel crisis support package: an increase in the Working for Families in-work tax credit will provide an additional NZ$50 a week to around 150,000 low- and middle-income working households with children.
The measure is expected to begin in early April and continue for up to a year, or end earlier if fuel prices fall below NZ$3 per litre.
For the current tax year, the annual household income thresholds for receiving the tax credit are approximately NZ$89,000 for a family with one child, NZ$112,000 for a family with two children, and NZ$135,000 for a family with three children.
The policy will cost around NZ$373,000,000. The Government stresses that it is temporary, targeted support for middle-class families struggling financially, intended to ease commuting and living pressures while avoiding broader fiscal expansion and additional inflation.
Oil prices rise first, followed by inflationary pressure
As conflict involving Israel, the United States and Iran continues to escalate, the closure of the Strait of Hormuz and attacks on key energy facilities in the Gulf have rapidly tightened global energy markets, sending international oil prices sharply higher.
For New Zealand, which relies heavily on imported energy, it is almost impossible to remain insulated from such developments.
In her prepared speech, Breman said New Zealand would very likely see higher headline inflation in the short term, while economic momentum would be somewhat weaker than the Bank had previously expected. She identified rising petrol and diesel prices as the most direct drivers. According to the Bank’s calculations, fuel-related items account for around 4% of the CPI, so inflation figures will respond quickly if international oil prices remain elevated.
Alongside fuel, fertiliser prices are another risk the Bank specifically highlighted. Breman said fertiliser futures prices in the Middle East had risen markedly, and it could take around nine months for those costs to flow through to farms and then into food prices on supermarket shelves. In other words, the effects of this imported shock may extend beyond the petrol station, gradually appearing in food bills as well.
The Bank’s tone has become noticeably firmer
On whether policy needs to tighten immediately, Breman took a measured position.
She made it clear that monetary policy should not overreact if the disruption is short-lived and petrol prices rise only temporarily. The reason is straightforward: raising interest rates would do little to curb this kind of short-term imported inflation, while further slowing an economic recovery that is already far from strong.
She said monetary policy usually takes six to nine quarters to have its full effect on inflation. Rushing to raise rates solely because of a temporary oil price shock could ultimately weaken growth further without helping to ease the immediate inflation.
That does not mean the Bank has let down its guard.
Breman also emphasised that if higher oil prices persist, or businesses begin raising prices more broadly and workers seek higher wages in response to rising living costs, causing inflation expectations to become entrenched, the Bank could raise interest rates to prevent these second-round effects from becoming embedded in the economy.
She repeatedly stressed that the response must come neither too early nor too late.
Markets have already moved
Although the Bank has not yet adjusted the OCR, financial markets and commercial banks have clearly begun repricing.
Before Breman’s speech, markets had at one point priced in some chance of a rate rise as early as April, with an increase by July almost fully priced in. Although some economists interpreted the overall tone of the speech as relatively dovish, market caution over the future path of interest rates has not disappeared.
Wholesale interest rates have risen noticeably over the past few days, and banks have responded.
ASB and Kiwibank both adjusted mortgage and term deposit rates today. Kiwibank raised its one-, three-, four- and five-year mortgage rates, while ASB increased its two- and three-year fixed mortgage rates and raised term deposit returns across several terms. ANZ and Westpac had already moved to raise rates.
In other words, borrowing costs have begun climbing before the Bank has formally acted.
For many borrowers preparing to fix their mortgages or facing a rate renewal soon, this is hardly a reassuring signal.
An already weak housing recovery faces fresh uncertainty
Complicating matters further, this external shock has arrived at an unfavourable time.
New Zealand’s economy is no longer in the phase seen in 2022, when demand was strong and consumer spending remained resilient. Instead, the current recovery is still fragile, household and business balance sheets are under greater strain than a few years ago, and market confidence has yet to truly recover.
The property market is the clearest example. Although the Bank has progressively lowered the OCR from its peak to 2.25%, house prices have not rebounded as quickly as they did in the past. Market data shows national house prices remain around a fifth below their pandemic peak, sales volumes are weak, properties are taking longer to sell, and many buyers are still waiting. As Cotality NZ Head of Research Nick Goodall has put it, the old assumption that falling interest rates mean a recovering housing market is increasingly being challenged.
Higher oil prices and financing costs caused by the escalation in the Middle East undoubtedly make that recovery more difficult.
For buyers, the absence of sharp house price rises may seem positive. Yet mortgage affordability has not improved significantly, the labour market is weakening, and relatively few people feel confident enough to buy. For developers, balancing construction costs, financing pressures and the pace of sales has also become more difficult.
In her speech, Breman also made an unusual, brief observation about fiscal policy.
In her view, fiscal policy is better suited than monetary policy to helping vulnerable households through an energy price shock. In other words, if the Government introduces fuel subsidies, cash assistance or other relief, it should aim to make them targeted, timely and temporary, avoiding excessive stimulus to demand that would in turn push up inflation.
Observations and reflections
The real difficulty with this shock is not simply that fuel prices have risen by a few cents, but that it could once again disrupt New Zealand’s tentative recovery.
If the shock is temporary, the Bank will most likely continue to watch developments without rushing to change the OCR. But if high oil prices persist and gradually spread into business pricing, wage negotiations and inflation expectations, it will have to reconsider whether to tighten policy sooner.
For ordinary households, the most immediate impact may come from everyday life rather than the Bank’s statements: filling up costs more, supermarket prices may not fall any time soon, and mortgage rates are starting to edge upwards again.
The problem is that another rise in living costs is precisely what New Zealand’s economy can least afford right now.
The market’s attention will remain on two questions: how long will the situation in the Middle East persist? And will this rise in oil prices be a temporary disruption, or develop into a more difficult medium-term inflation problem?
If the former continues to escalate, the risk of the latter will be difficult to underestimate.