Breman on Iran conflict impact for NZ economy
Reserve Bank of New Zealand Governor Anna Breman outlined the potential impact of the ongoing Iran conflict on the New Zealand economy. She expects higher near-term inflation and somewhat weaker growth momentum, while affirming the RBNZ's readiness to maintain price and financial stability.
Strait of Hormuz disruption fuels global price hikes
The escalation of conflict in the Middle East in late February, particularly military action against Iran, has significantly disrupted global trade through the Strait of Hormuz.
This vital waterway, bordering Iran, handles approximately 20 percent of globally traded oil and liquefied natural gas, and one-third of the global fertiliser supply.
Markets reacted immediately, with crude oil prices exceeding USD$100 a barrel, a level not seen since early 2022.
Prices for refined petroleum products, fertiliser futures, and global wheat, corn, and soybean prices have also increased.
This has led to announcements of higher airfares and rising domestic and global transport costs.
Global financial markets have experienced considerable volatility, with longer-term global interest rates rising due to higher inflation expectations in the US and euro area.
Global stock markets have fallen, and the US dollar has appreciated, acting as a safe-haven currency.
Kiwi economy braces for inflation and slower growth
The Middle East conflict will influence New Zealand's economy through trade disruptions, financial market impacts, and elevated uncertainty.
The RBNZ anticipates higher near-term inflation, primarily from increased petrol and diesel prices, which constitute about 4 percent of the Consumers Price Index.
For example, 91 Octane petrol rose from $2.50 to $3.29 per litre since late February.
Indirect first-round effects include higher airfares due to fuel costs and airport closures.
Higher fertiliser prices could impact supermarket food prices within nine months, particularly for spring planting.
The New Zealand dollar has depreciated by about 1.5 percent since late February, potentially boosting exports but also generating inflationary pressure through higher import prices.
The RBNZ expects somewhat weaker economic growth in 2026 due to squeezed margins, lower real incomes, reduced access to Middle Eastern export markets (4-5% of total goods/services), and dampened demand from major trading partners.
Shipping disruptions and increased uncertainty also weigh on business investment and household spending.
Vigilance in uncertain waters
The RBNZ's emphasis on looking through first-round effects to focus on medium-term second-round impacts is a sound framework for navigating global supply shocks.
However, the cumulative and persistent nature of current disruptions could challenge this approach, demanding a nuanced assessment of how temporary spikes might embed into expectations.
While the financial system shows resilience, the broader economic slowdown and the resilience of borrowers and businesses facing squeezed profitability warrant continuous, close monitoring.
This complex interplay of inflation, growth, and stability mandates requires a flexible policy stance, balancing immediate pressures with long-term price stability goals.