What does Iran war deal mean for New Zealand interest rates?

5:43 pm today

Photo: RNZ / Quin Tauetau

An apparent end to the conflict in the Middle East, and the fall in oil prices, may not be enough to stop official cash rate hikes. But, economists say, at least they'll be for good reasons.

It had been expected that central banks around the world, including in New Zealand, would need to hike interest rates to counteract inflation from rising fuel prices.

But economists say there are increasing signs that the worst-case inflation scenario won't now happen. We still might need to increase the official cash rate, but it's more likely to be because the economy is picking up again, than because external factors are making life tougher.

Infometrics chief forecaster Gareth Kiernan said data seemed to indicate that inflation could now be tracking a bit lower than had initially been forecast.

"Diesel prices have moderated quite a bit over the last couple of months."

An update from Stats NZ on Tuesday showed petrol prices down 3.8 percent in May and diesel prices down 11.4 percent.

"Add in the possible resolution to the conflict and the continuing downward trend in international oil prices that we're seeing, and it looks like some of the most acute inflationary concerns we had back in March and April won't come to pass."

Oil prices have fallen quite significantly on news of a deal being signed. The Commerce Commission has indicated it is watching businesses and petrol companies to ensure that falls in their costs flow through to customers.

Kiernan said the Reserve Bank would probably still need to push against some of the near-term inflationary risks. If confidence improved and the economy started to pick up again as fuel prices fell, that could create its own inflation.

He said the current official cash rate was still at a level where it was stimulating the economy.

"I'd still see a case for the bank to lift the official cash rate back towards 3 percent during the second half of this year, but they probably have more ability to take a considered or data-driven approach than if fuel prices were higher and there was a greater risk of stronger or more persistent inflation continuing into 2027 and beyond. At this stage, increases past 3 percent look to be less necessary, and if the bank does end up having to lift the OCR further, it will probably be more a reflection of a stronger performing economy than the flow-on effects of high oil prices."

BNZ chief economist Mike Jones said lower oil and fuel prices could take the edge of inflation, if they were sustained, which could mean less need for rates to rise.

"But fuel price relief will also help in taking some of the pressure off discretionary incomes, and demand in the economy more generally, factors which are more important for the medium-term trend in inflation.

"It's clear we're still operating in an environment of heightened uncertainty, with plenty of factors for the Reserve Bank to balance. We end up coming back to the 2.25 percent stimulatory starting point for the Official Cash Rate, and the RBNZ's intention to start removing some of that stimulus, given the inflationary outlook. That leaves us continuing to expect the first lift in the OCR at the July meeting."

ANZ said it expected the Reserve Bank to push ahead with a hike next month but it was "not the (near) slam dunk" it had previously been.

Its economists said they were still comfortable forecasting hikes in September and October, too, but they were more data-dependent than previously.

"Given reduced upside risks stemming from the cost shock, less urgency may mean the Reserve Bank is comfortable with a slower pace of hikes."

They said the OCR track published in the September update might imply a more gradual hiking cycle.

"Our OCR forecast might be unchanged, but three hikes because the economy is recovering would be a much more palatable scenario than three hikes because of an unpleasant cost shock that is bad for growth."

Westpac has revised down its forecast for inflation this year. Its economists said they expected the first official cash rate increase to come in September.

"Reinforcing the case for a continued pause in July, recent business surveys have pointed to a cooling in activity. There's also been softness in the labour market, with limited upward pressure on wages despite the rise in living costs."

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