Oil shock to lift inflation, strain household budgets and public finances
Westpac says New Zealand’s fragile economic recovery has been knocked off course by the Iran war, with higher inflation, rising interest rates, and a weaker housing outlook on the horizon.
Oil shock to drive NZ inflation higher and force OCR hikes
Westpac’s May Economic Overview now pegs 2026 GDP growth at 1.5%, down from the more upbeat projections it released in February, citing surging oil and refined fuel prices that are squeezing household incomes and lifting business costs.
Chief economist Kelly Eckhold (pictured) notes that real petrol and diesel prices are now “at 50-year highs”, with global oil prices at levels historically associated with recessions, although the bank still expects a pause in the recovery rather than a full‑blown downturn.
The energy shock is expected to feed through into broader price pressures. Westpac now sees annual CPI inflation rising to around 4.5% in coming quarters and staying above 3% until mid‑2027, driven by fuel, transport, and other input costs, along with higher administered prices such as council rates and electricity.
Fresh projections from Infometrics point in the same direction, with the consultancy expecting higher fuel prices to push annual inflation to 4.8% this quarter and to remain above the RBNZ’s 1–3% target band well into 2027. Infometrics has also cut its 2026 GDP growth forecast from 2.5% to 1.3%, highlighting weaker household spending as higher prices and mortgage rates erode real incomes.
Core inflation is projected to remain elevated, with the bank warning that “core inflation looks set to rise above the top of the RBNZ’s target range”.
That shift in the inflation outlook implies a materially different path for monetary policy. Westpac expects the Reserve Bank to begin lifting the official cash rate (OCR) from September, taking it from 2.25% now to 3% by the end of 2026 and 4.25% by late 2027, closer to what it sees as neutral‑to‑restrictive settings.
The bank says the OCR is “set to rise soon” but emphasises considerable uncertainty around the eventual peak, depending on how long the conflict and associated price shock persist.
War-driven costs to weaken housing, widen deficits, and lift debt
The housing market is expected to soften again after tentative gains earlier this year. Westpac forecasts national house prices will fall 0.9% over 2026, following a 0.1% decline in 2025, before returning to modest growth in 2027.
While a rebound in net migration should support demand, Westpac argues that rising living costs, softness in sentiment, and higher interest rates will dominate the housing outlook in the short term.
On the fiscal side, Westpac says the same forces will leave the government with a larger‑than‑expected funding task even though its stated strategy is unchanged. In its preview of Budget 2026, the bank estimates the cumulative OBEGALx deficit over the forecast period will increase by around $8 billion compared with the 2025 half‑year economic and fiscal update, as higher welfare and debt‑servicing costs collide with softer tax revenue.
Extra capital spending and weaker revenue are expected to lift the bond programme by $7–9 billion over four years.
Net core Crown debt is expected to “peak at around 48% of GDP in 2028/29, before declining gradually thereafter”, a trajectory the bank says would not, by itself, be enough to prompt a sovereign ratings downgrade.
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