The Reserve Bank of New Zealand (RBNZ) has warned that global events are reshaping the outlook for inflation and economic growth, with potential implications for future interest rate decisions.
Since the February Monetary Policy Statement, the outbreak of war in the Middle East has materially altered the economic landscape. The Monetary Policy Committee said the conflict has disrupted global supply chains and pushed up oil and fuel prices, contributing to higher inflation – which was 3.1% in the year to March – in the near term.
It added that global financial markets have been volatile and market interest rates have risen.
Locally, the extent of any inflation increase will depend on how the conflict evolves and how long disruptions to energy markets and supply chains persist. While higher costs may flow through to prices and wages, the Committee noted that weak demand and spare capacity in the economy should limit how much businesses can pass those costs on.
The Committee also highlighted that the current environment differs from the inflation surge seen in 2022. At that time, strong demand amplified the impact of supply disruptions, whereas current conditions are more subdued.
What this means for interest rates
The RBNZ has left the official cash rate (OCR) unchanged at 2.25% in its two most recent meetings, following a series of cuts totalling 3.25 percentage points through 2024 and 2025. However, the latest update suggests the future path for interest rates is less certain than it was earlier in the year.
The Committee emphasised its focus on ensuring that inflation returns to the 2% target midpoint over the medium term.
If inflation pressures become more persistent – for example, if higher costs lead to sustained increases in wages and prices – the RBNZ said “decisive and timely increases in the OCR would be required.”
Why this matters for borrowers
For borrowers, this means the period of falling interest rates may have paused, with the next move less predictable. While weaker economic conditions can limit inflation, external shocks such as rising oil prices can push it higher.
In practical terms, this creates a more balanced outlook. Interest rates may remain steady for a time, but there is also a possibility they could rise again if inflation proves more persistent than expected.
Understanding how inflation trends feed through to interest rates can help borrowers make more informed decisions about fixing, refinancing or structuring their loans.
Some of your clients may be wondering how the inflation outlook could affect interest rates, borrowing costs or loan strategy. Please feel free to pass my details on.
