Are we set for early OCR hikes as petrol prices surge?

No need to panic. That was the clear message from Reserve Bank of New Zealand (RBNZ) Governor Dr Anna Breman this week.

Despite an escalating situation in the Middle East and a rapid rise in oil prices, the RBNZ won’t rush into a knee-jerk response.

That matters, because the latest global shock is already starting to show up in New Zealand in the most visible way possible – at the petrol pump.

The conflict between the US and Iran has disrupted one of the world’s most important trade routes, the Strait of Hormuz.

This narrow stretch of water carries around a fifth of global oil supply, along with significant volumes of gas and fertiliser.

When that flow is threatened, prices move fast.

The impact of this will feed directly into local inflation, reversing some of our recent progress and reminding households that global events can still hit close to home.

If you prefer to listen to a podcast episode on this topic: 

At the beginning of the week that saw wholesale interest rates jump to their highest since July 2024, and markets pricing move to imply we’d get three Official Cash Rate (OCR) hikes this year.

However, the RBNZ has reminded us that context matters in these situations.

This is a classic supply shock, one that pushes inflation higher but does the opposite to economic growth.

Higher fuel costs are rippling through the economy lifting transport costs, airfares, and food prices.

At the same time, this is putting the squeeze on household budgets and profit margins for businesses.

For a small, open economy like ours, that combination is particularly challenging.

We export goods into a world that is suddenly looking weaker, while we import goods that have immediately become more expensive.

Economic activity slows while prices rise. “Stagflation-lite”, you might say.

That creates a balancing act for central banks, but the calm tone from the RBNZ is because not all inflation is created equal.

A temporary spike in petrol prices is very different from broad-based, persistent inflation driven by rising wages and strong demand.

Monetary policy can’t do much about the former, but it must act decisively if the latter becomes entrenched.

That means the Bank is likely to “look through” an initial jump in inflation, rather than hike the OCR prematurely.

Keep in mind the RBNZ’s mandate, which is to keep inflation within its 1-3 per cent target over the medium term.

That’s generally thought of as one to two years out, so even if the inflation rate spikes toward four per cent the RBNZ needs to focus on where it will be in late 2027.

Cranking up the OCR would do little to bring petrol prices down, but it would further weaken an economy that is still in the early stages of recovery.

The backdrop today is quite different from the last time oil prices surged above US$100.

That was in 2022 and demand was strong, savings were high and businesses had more pricing power.

Things are softer in 2026 with households already more stretched, balance sheets tighter and the economy operating below capacity.

That lowers the risk of a temporary spike in costs turns into something more persistent.

What the RBNZ will be watching closely from here is behaviour.

If businesses begin lifting prices aggressively or workers demand higher wages to compensate for higher costs, inflation expectations could rise.

That’s when a temporary shock becomes a lasting problem, which the RBNZ would have to respond to.

I’ll be watching the ANZ Business Outlook survey this coming Tuesday for evidence of how businesses are reacting, while the next household expectations survey in May will tell us what consumers are thinking.

For now, the early signs suggest the RBNZ can take its time.

Sharemarkets have weakened, prospective homebuyers have pulled back and uncertainty has risen.

All of that tends to dampen activity, rather than fuel it.

The combination of higher inflation and weaker growth isn’t what we need right now.

However, the RBNZ is taking a measured approach to this, and so should we.

While inflation is clearly set to spike, the bigger question is how long that lasts and how people respond to it.

Market Insights enewsletter

Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.

Subscribe Now