'It’s nightmare time for the RBNZ. Supply shocks cannot be handled well by central banks. We have had plenty of recent evidence of this'

BNZ economists see annual inflation spiking to 3.6% by the June quarter on the back of the Middle East crisis.

Our rate of inflation was already elevated, rising to 3.1% for the December quarter and above the Reserve Bank's 1% to 3% target range.

In an Economy Watch publication titled 'NZ recovery under the pump', BNZ head of research Stephen Toplis said "not surprisingly", the economists were are being asked what all the Middle East uncertainty does to their forecasts.

"The simple answer is that it throws them into chaos because we, like everyone else, have little idea how all this will play out. We do, nonetheless, have strong views on direction and the wider implications of current developments.

"We have already raised our inflation forecasts such that annual headline inflation averages over 3.0% for the whole of 2026 peaking at 3.6% in the June quarter. We haven’t, however, really been able to take a clear view on second round effects from the oil price rises which will almost certainly see our inflation forecasts pushed even higher. At some point oil prices will tumble. When, exactly, is the big question," Toplis said.

This is "nightmare time" for the RBNZ, he says.

"Supply shocks cannot be handled well by central banks. We have had plenty of recent evidence of this. We doubt the RBNZ will want to provide much guidance until there is greater clarity. Ultimately, though, the inflationary implications of this process are evident so the balance of risk tilts towards tighter monetary policy than previously thought especially given that there is a high risk that inflation expectations become unanchored."

In Westpac's Weekly Economic Commentary, senior economist Satish Ranchhod says that based on what’s already occurred, "we could reasonably expect" some setback to economic growth due to higher energy and transport costs, disruptions to trade and tourism, and a hit to business and consumer confidence.

"Reflecting those headwinds, we’ve revised down our forecast of GDP growth over 2026 from 3.3% to 2.8%. We also expect that unemployment will now take longer to fall," he says. The Westpac economists have revised up inflation forecast and now expect it will rise to 3.2% in mid-2026, easing only modestly to 2.8% in the December quarter.

"That’s up substantially from our previous end-of-year forecast of 2.3% which we had expected prior to the conflict."

Ranchhod notes that at the time of writing, financial markets are more than fully pricing in a 25-basis point to the Official Cash rate by September and a follow-up hike by the end of this year.

"However, we think this will likely prove a misreading of the RBNZ’s approach to monetary policy. Higher interest rates now would not prevent the oil related rise in inflation already in train. But hiking interest rates sooner would likely compound any downturn in activity stemming from the increase in inflation, potentially exacerbating the downturn in inflation once the shock passes and oil prices recede," he says.

"As a result, even with a substantial lift in the inflation outlook, we expect the RBNZ will be hesitant to hike rates sooner than previously anticipated. Instead, we continue to expect the RBNZ will remain on hold until December. In a severe event that materially dampens global and domestic growth – especially one in which fuel supply is rationed – the RBNZ could even consider rate cuts."

The RBNZ will not be complacent, however. It will closely monitor whether the lift in inflation currently in train results in higher medium-term inflation expectations – "short-term survey measures will surely rise" – and changes in wage and price setting behaviour that might suggest a prolonged uplift in inflation.

"But that’s less of a risk given our starting point. Unlike some economies, New Zealand already has substantial spare capacity and higher than normal levels of unemployment. That limits the scope for price increases to feed off each other."

In Kiwibank's First View publication, chief economist Jarrod Kerr and economist Sabrina Delgado say it's the demand shock that "worries us for New Zealand".

"We have a weaker starting point, and are in the very early stages of recovery. Such a shock will deflate growth expectations, and is yet another wave of uncertainty for Kiwi households and businesses. There is a very real risk that offshore developments derails our recovery… in the same way Trump’s liberation day tariffs did last year."

They say higher oil prices "act like a tax on consumption".

"And every economy will be impacted, causing a global slowdown. All Kiwi exports may come under pressure… and it’s the Kiwi exporters leading much of our recovery to date. Domestically, we’ll face the same hit to consumption and business activity. We’ve already started to feel the pain of the conflict on our shores, with petrol prices rising rapidly. Prices may rise further as importers start paying replacement rates for fuel. The softening Kiwi dollar will not help here. But it will help our exporters."