Rising fuel and oil price risks push economists to lift both inflation and rate forecasts
New Zealand's annual inflation rate climbed to 4.1% in the June quarter — its highest level since December 2023 — as fuel prices and Middle East volatility push economists to revise their interest rate outlooks higher.
Fuel drove the headline number, but underlying pressures remain contained
The print landed above the Reserve Bank's 1-3% target band, but both ASB and Kiwibank economists say the underlying picture is more nuanced than the headline figure suggests.
Petrol and diesel prices rose 20% and 50% respectively over the quarter, contributing more than 30% of the annual increase. Kiwibank noted the headline rate would have sat within the band, "printing at 2.9%," had petrol and diesel price rises been stripped out. Domestic, non-tradeable inflation actually eased slightly, down from 3.5% in March to 3.4% in June — a sign, according to Kiwibank, that "domestic activity is still soft."
ASB draws a similar but more granular conclusion, pointing to a broader base of price pressure beneath the fuel-driven headline: "prices rose for over half of the CPI items (equating to 70% of the CPI weight)." Construction costs rose 1.6% over the quarter, with ASB flagging the sector's exposure to both higher fuel costs and petrochemical-linked plastic inputs disrupted by Middle East trade tensions.
RBNZ's first move sparks split forecasts on what's next
The Reserve Bank has already acted once this cycle, lifting the OCR by 25 basis points to 2.5% on 8 July, in a decision reached by consensus. At the time, the RBNZ pointed to a partial reopening of the Strait of Hormuz as having driven oil prices lower — a call that looks pre-emptive given the escalation that followed. Now, bank economists are debating how much further the OCR will need to rise.
The renewed conflict between the US and Iran, including a new blockade risk in the Red Sea, has pushed Brent crude briefly above US$100 a barrel — its highest level in two months — reigniting global inflation concerns and lifting bond yields across NZ, the US, UK, Australia, and Japan.
Against that backdrop, ASB now expects inflation to "remain close to 4% over the remainder of 2026," an upward revision from its outlook just weeks earlier, and has pencilled in 75 basis points of OCR hikes this year, taking the cash rate toward 3.25% by year-end.
Kiwibank takes a more measured view, expecting the OCR to reach 3% by the end of 2026 before a long hold through 2027, with inflation returning to 2% by mid-2027 as fuel price relief flows through.
Westpac, meanwhile, argues the risk sits to the upside of even the RBNZ's own numbers. Senior economist Satish Ranchhod noted the June result came in "above the RBNZ's updated July forecast which anticipated 3.9% annual inflation," and cautioned that underlying price pressure hasn't disappeared: "core inflation is not 'low'," with several measures still tracking close to 3%. Westpac expects further 25bp hikes in September and December, with an additional move in October "can't be ruled out."
All three banks agree the path hinges heavily on how the Middle East situation evolves, with Kiwibank noting shipping volumes through the Strait of Hormuz remain far below historical averages even amid intermittent ceasefires.
That uncertainty leaves advisers with little choice but to plan for further rate movement in either direction.
For more insights, read the ASB and Kiwibank reports.
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