WELLINGTON –
Reserve Bank Governor Anna Breman told Business NZ’s CEO Forum that New Zealand is likely to face higher headline inflation in the near term and “somewhat weaker growth momentum” as a result of the conflict in the Middle East, and that the bank will weigh first-round price shocks against medium-term inflation risks when setting policy.
The governor set out the channels through which the shock is already transmitting to the New Zealand economy and identified the central decision the Reserve Bank faces: avoid responding too early to supply-driven spikes that monetary policy cannot address, but act if above-target inflation becomes embedded.
“We are likely to see higher headline inflation over the near-term, and somewhat weaker growth momentum.”
Inflation channels: fuel, fertiliser and pass-through timing
Breman highlighted higher petrol and diesel prices as the primary source of near-term headline inflation pressures, noting fuel accounts for roughly 4% of the Consumer Price Index. She cited a rise in pump prices as an example of first-round effects: “the average price of 91 Octane across New Zealand was about $3.29 per litre on Monday morning – compared to $2.50 in late February.”
She warned that second-round effects could follow as higher oil and freight costs are passed into other goods and services – for example, air fares – and that some agricultural cost increases, particularly fertiliser, may take longer to show up in supermarket prices. “Higher fertiliser prices could take up to nine months to pass through to the supermarket for some foods,” Breman said, and added that spring planting cycles in the northern hemisphere could accelerate that pass-through for internationally priced commodities.
The governor reiterated that core inflation measures have been lower than headline readings: “core inflation has been steady at 2.4% for some time,” and she said the Reserve Bank retains the tools to meet the 2% target midpoint over the medium term under its remit to keep inflation between 1% and 3% on average over the medium term.
Trade exposure, transport links and supply chains
Breman flagged disrupted air links and shipping as channels for both price and activity effects. She noted that the closure of major airport hubs in the Middle East and constrained global logistics would raise transport costs and delivery times, amplifying price pressures and affecting the timing of imports for production.
She underlined New Zealand’s export exposure to the region for particular agricultural products, saying Middle Eastern markets account for “about 4-to-5% of total goods and services which New Zealand sells internationally,” primarily dairy and meat. If firms cannot find alternative buyers, Breman said, reduced access to those markets would directly affect exporters’ revenues and production choices.
The speech placed the oil shock in the context of global financial conditions: “higher wholesale interest rates and lower equity prices are already tightening global financial conditions, meaning higher borrowing and financial costs for some households and firms.” That tightening, together with heightened uncertainty, is likely to weigh on business investment and household spending.
Monetary policy stance and operational considerations
Breman emphasised the Reserve Bank’s two-sided task: identify supply-driven, near-term inflation pressures that monetary policy should “look through,” while remaining vigilant to risks of persistent inflation expectations that would require policy tightening. She warned against acting “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.”
The bank’s primary instrument is the Official Cash Rate, and the Monetary Policy Committee will consider the unfolding shocks when it meets on April 8 to set the OCR. Under New Zealand’s framework, the committee operates within a joint remit agreed between the Minister of Finance and the Governor and governed by the Reserve Bank of New Zealand Act, which requires it to pursue price stability and support maximum sustainable employment. Market participants typically focus on the bank’s assessment of the balance between first-round pass-through (fuel and freight-driven) and second-round, domestically amplified inflation dynamics when pricing short-term interest rate expectations.
For operational context, major global shipping chokepoints such as the Strait of Hormuz are well-established transmission routes for energy market disruptions, and airlines use Middle Eastern hub airports extensively for long-haul connectivity – both elements that influence how quickly international shocks affect domestic transport costs and consumer prices. Recent volatility in crude oil benchmarks has added to that uncertainty for local fuel retailers and transport operators.
Sectoral implications and timing for producers
Breman flagged timing differences across sectors. Farmers’ autumn fertiliser requirements in New Zealand are already in hand, and fertiliser imports typically decline over winter, so immediate farm-level cost pressure may be limited for some producers. She warned, however, that fertiliser use will pick up for spring planting and that northern-hemisphere planting schedules could accelerate global demand and pass-through into on-farm costs.
The Reserve Bank’s assessment that New Zealand is a price-taker for certain food commodities indicates domestic retail price movements will increasingly reflect global market developments for fertiliser and internationally traded agricultural commodities. That dynamic complicates fiscal and regulatory responses, leaving monetary policy and any targeted government cost-of-living measures to work in parallel rather than at cross-purposes.
Reserve Bank Governor Anna Breman has explained how the conflict in the Middle East will impact New Zealand’s economy over the near and medium-term.
Breman told the forum she would not pre-empt the committee’s April 8 decision on the OCR, and that the committee would “look through” first round direct and indirect effects while focussing on medium-term second round effects. She promised to outline the bank’s approach to assessing risks to inflation expectations and the data used in that assessment in its next Monetary Policy Statement.
“We should try to avoid 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.”
Headline inflation in the December 2025 quarter was recorded at 3.1%, above the top of the bank’s target band, while the governor noted core inflation remained at 2.4% and wage growth was subdued. Breman described the economy as being “at the early stages of an economic recovery” and said inflation expectations over the medium term “remain well anchored.”
Operationally, the Reserve Bank’s decision will be watched by exporters, importers and financial markets for signals on how the bank interprets supply-driven price shocks relative to domestically amplified inflation – a balance that drives short-term interest rate expectations and borrowing costs for firms and households. For reference on the bank’s policy instrument, see the Official Cash Rate (OCR) information page on the Reserve Bank of New Zealand website.
Supply-chain channels cited by the governor – including disruptions to long-haul air hubs and shipping routes – are established transmission mechanisms for energy and freight shocks; for background on one key maritime chokepoint, see publicly available information on the Strait of Hormuz.
The bank’s most immediate procedural step is the Monetary Policy Committee meeting to set the OCR on April 8; headline inflation was recorded at 3.1% in the December 2025 quarter, and core inflation sat at 2.4%. Any decision to move, hold or signal a future path for the OCR will feed directly into retail interest rates, shaping how quickly global shocks transmit into New Zealand mortgages, business lending and, ultimately, the pace of the recovery.
