Easing fuel prices bring cautious optimism, but rate rises loom through 2026
New Zealand's economy is showing early signs of a gradual recovery as global fuel prices retreat from their earlier highs, according to the NZ Institute of Economic Research's (NZIER) latest Quarterly Predictions. But the improvement remains tentative, with households, businesses and the Reserve Bank all still treading carefully.
NZIER attributed the easing fuel pressure to a partial reopening of the Strait of Hormuz, expanded use of alternative Middle East export routes, and greater supply from other producers, all of which have taken pressure off crude oil prices and helped calm financial markets.
Business confidence has ticked up modestly in the institute's latest Quarterly Survey of Business Opinion, with early signs of a pickup in manufacturing and services activity.
Consumers remain cautious despite improving conditions
Despite the brighter tone, spending and hiring have yet to follow. Retail volumes fell in the June quarter as elevated petrol and electricity costs squeezed discretionary budgets, while unemployment climbed to 5.6%.
NZIER said firms remain hesitant on hiring and investment, with global uncertainty and the upcoming general election likely to keep a lid on spending decisions for the rest of 2026.
Inflation elevated, but core pressures more contained
Annual CPI inflation rose from 3.1% in the March quarter to 4.1%, driven largely by the earlier fuel and electricity price surge.
NZIER noted underlying pressures look more contained, however, with inflation excluding food, household energy and vehicle fuels sitting at 2.5%, and inflation expectations easing alongside falling fuel costs.
Some of the fuel-driven cost pressure is filtering into broader business costs — particularly in construction, agriculture and transport — though NZIER said "spare capacity in the labour market and subdued wage growth are limiting firms' ability to pass these costs on to customers."
The institute expects annual CPI to stay above the RBNZ's target band for the remainder of 2026, before easing in 2027.
More OCR increases expected as RBNZ targets neutral
Having begun its tightening cycle with a 25-basis-point hike in July, the RBNZ was widely expected to raise the OCR again in September as the recovery took hold. The bank delivered on that expectation on 2 September, lifting the OCR by 25 basis points to 2.75% — its second consecutive hike — citing the same oil-shock-driven inflation pressures NZIER's report flags.
NZIER cautioned that "keeping monetary policy loose for too long as economic activity recovers would increase the risk that inflation pressures become more persistent," with pricing and cost indicators to be closely watched for signs the fuel shock is becoming embedded in wage- and price-setting behaviour more broadly.
Stay informed with the latest housing market trends and mortgage insights — subscribe to our free daily newsletter.
