The Reserve Bank has left the Official Cash Rate unchanged at 2.25%, warning that inflation is expected to rise sharply this year as the Middle East conflict drives higher fuel and energy costs while weakening economic growth.
The Monetary Policy Committee said annual inflation is expected to peak at 4.3% in the September quarter before returning to the Reserve Bank’s 2% target midpoint in mid-2027.
The Committee says disruption to global oil and petrochemical supply chains through the Strait of Hormuz has increased fuel prices and broader input costs, including plastics and fertilisers.
“The Middle East conflict is increasing near-term inflation and weakening economic activity,” the Committee says.
The Reserve Bank says the New Zealand economy had been entering the early stages of recovery prior to the conflict, but higher fuel costs and weaker confidence are now expected to slow growth.
GDP growth in 2026 is now forecast to be 0.9 percentage points lower than projected in the February Monetary Policy Statement.
The Committee says consumer confidence has fallen sharply, the housing market remains weak and businesses are reporting lower confidence, squeezed profit margins and reduced investment intentions.
At the same time, the Reserve Bank says spare capacity in the economy and elevated unemployment are expected to limit medium-term inflation pressures.
The Committee says financial conditions have tightened this year, with higher wholesale interest rates flowing through into mortgage rates.
The average mortgage interest rate is expected to rise from 4.9% in March to 5.3% over the next 12 months.
The OCR decision was evenly split, with three Committee members voting to leave rates unchanged and three preferring an immediate 25-basis-point increase to 2.5%.
Under Reserve Bank rules, the chairperson exercised the casting vote to keep the OCR on hold.
The Committee says OCR increases are still likely later this year.
“On balance, the OCR will most likely need to increase sooner and by more than envisaged in the February Monetary Policy Statement,” the Committee says.
Three members supporting a hold argued core inflation, wage growth and medium-term inflation expectations remain broadly contained, while weaker economic activity and tighter financial conditions are already slowing demand.
The three members favouring an immediate rate rise warned that higher fuel and input costs risk becoming embedded in broader inflation and wage-setting behaviour.
The Reserve Bank says the pace of future OCR increases will depend on whether inflation pressures prove more persistent than expected or whether weak economic activity continues to dominate.
