As widely expected, the Reserve Bank (RBNZ) left the Official Cash Rate (OCR) unchanged on 8 April, once again holding things steady at 2.25%.
It was a tricky decision for the RBNZ— demanding a careful balancing act between what’s best for New Zealand’s economic recovery vs. the question of how to respond to the major inflationary forces playing out overseas right now.
Domestically, while things are starting to look up, our economic recovery is still on shaky ground
Unemployment’s higher than we’d like it to be, and people don’t yet have the confidence to go out spending (still reeling from the $570 billion wiped off our collective wealth by falling house prices), meaning many businesses are still doing it tough.
Meanwhile, surging oil prices are putting Kiwi under further pressure— impacting not just consumers at the petrol pump, but also agriculture and construction businesses as well.
The last thing we need is for interest rates to start climbing again, threatening to derail what little progress we’ve managed to make.
And then there’s also the matter of global inflation to consider
Wholesale rates have spiked dramatically in recent weeks, driven by the expectation that climbing oil prices will flow through to much higher levels of global inflation.
The markets are now anticipating central banks the world over will end up needing to push through rate hikes in order to get inflation back in its box.
So, the other question the RBNZ was facing this week was whether pre-emptive action was needed, and how quickly, to get ahead of the inflation threat.
At this stage, it’s opted to hold steady—but interest rate hikes may still be on the cards sooner than originally anticipated.
What’s the outlook on the OCR and interest rates from here?
How things play out over the next little while will be heavily dependent on just how quickly the situation in the Middle East gets resolved.
For now, the hope—and the assumption the RBNZ is working on—is that that should happen sooner rather than later.
At the time of writing, the US and Iran have just announced plans to implement a two-week ceasefire, which would include the reopening of the Strait of Hormuz.
But while that’s good news, it doesn’t mean we’re completely out of the woods.
Trump’s track record of flip-flopping on critical foreign policy still presents some cause for concern—as does the question of what happens beyond the next fortnight, if the ceasefire goes ahead.
Assuming things do play out as hoped, oil shortages will start to ease, but given the damage sustained to critical infrastructure over the conflict to date, things aren’t going to go back to normal in a hurry. There will likely be a degree of oil price inflation that sticks around, even once supply chains are back up and running again.
For us in New Zealand—once you factor in shipping times to the refineries we use in South Korea and then on to New Zealand—there would still be a lag of several weeks before any meaningful relief is felt at the petrol pumps.
The good thing is that the US (i.e. Trump) does have a pretty big incentive to get this thing resolved as quickly as possible.
America had already been grappling with an inflation problem for a while, even before the current oil crisis took hold. Inflation doesn’t do anyone any favours—either economically or politically—and so the US just can’t afford to let this drag on. The cost would be too high.
In short, at this stage, the outlook on interest rates is still pretty uncertain
Best-case scenario, if the ceasefire holds and oil shortages start to ease, we’re likely to see wholesale rates come down slightly.
But the reality is—with bank margins running as tight as they are at the moment— mortgage rates should already be tracking upwards, and borrowers still need to be prepared for that eventuality.
In times of volatility, it's always a good idea to chat with an expert mortgage broker for guidance on the best strategy for you and your situation. Generally speaking, though, if you're particularly sensitive to rate increases, the recommendation would be to fix ASAP—locking in a degree of certainty around your repayments and offering some protection against short-term volatility.
Worst-case scenario, if it takes longer than expected for the situation to be resolved, and inflation starts to sink its teeth in, then the RBNZ may be forced to revise its interest rate forecast, bringing forward timings for rate hikes (which at this stage are factored in from late this year).
We’ll get a clearer steer on that as part of the RBNZ’s next full Monetary Policy Statement, scheduled for 27 May 2026.
If (god forbid) the oil crisis does continue, what would that mean for inflation in New Zealand?
The potential threat that inflation would pose for New Zealand (as opposed to some other markets around the world) is doubled given that we’re only just starting to come out the back of a pretty long and drawn-out recession.
The situation’s looking up, sure, but things are still fragile out there.
During more “normal” times, the major risk with this sort of inflationary pressure is the potential for it to become entrenched in the economy via the wage-price spiral:
- Input costs go up, and businesses pass that on to consumers by lifting the price of their goods and services.
- When there’s a shortage of labour, workers have the leverage to demand higher wages to help cover the increased cost of living.
- That, in turn, further increases input costs for businesses—who respond by raising prices again.
- And round and round it goes.
But if there’s a silver lining to our economic situation right now, it’s that with all the excess capacity out there, the conditions just aren’t there for any wage-price spiral to take hold.
Consumer demand isn’t strong enough for businesses to justify price hikes, meaning profitability would take a hit. And with profitability down, the chance of wages growing to match the higher cost of living would be slim at best.
The net result, unfortunately, is that if the oil crisis doesn’t resolve quite as quickly as hoped, Kiwi businesses and consumers would be forced to absorb those higher costs for longer—meaning there would be more short-term pain to come.
At this stage (fingers crossed) it shouldn’t come to that.
About the author: John Bolton (JB), Squirrel Founder & Group Head of Property Finance