Deals and dots mean changes for central banks

The news of a potential deal between Iran and the US couldn’t have come soon enough.

The conflict had gone on for 15 weeks, much longer than initially expected and hoped.

That had raised the stakes for the inflation outlook, threatening to force the hand of central banks and make 2026 a very challenging year.

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It still looks shaky, but there’s now hope we might be able to avoid some of the more dire scenarios.

That might also mean the Reserve Bank won’t have to do quite as much as many feared to rein inflation in.

Markets have reacted positively to the news of last weekend.

Oil is down some 25 per cent from last month’s peak, global sharemarkets have pushed higher and odds for hikes in the Official Cash Rate (OCR) have slipped.

Earlier this month financial markets saw an almost 90 per cent chance of the first OCR hike coming in July, while a total of three 0.25 per cent moves were expected before the end of this year.

A move up is still expected in July, but markets are less confident.

Odds pulled back to below 70 per cent at one point last week, while just two 0.25 per cent increases in 2026 might now be more likely.

We’ve seen a similar reaction across wholesale interest rate markets, which have a bearing on mortgage rates.

New Zealand’s five-year swap rate was over 4.2 per cent in March, the highest since mid-2024 and a big move up from 3.5 per cent in late February.

That was on the back of higher oil prices, expectations of rising inflation and similar increases offshore.

It’s been as low as 3.6 per cent in recent days, almost back to pre-conflict levels.

It’s not just these developments that will have given the Reserve Bank food for thought.

We’ve also seen some inflation indicators, such as Stats NZ’s Selected Prices release for May, come in softer than expected.

Westpac and ANZ have pulled back their inflation forecasts for the June and September quarters to just above four per cent.

Meanwhile, ASB has reduced its estimate for the December quarter of this year to 3.6 per cent.

These are all lower than what the Reserve Bank had in its May Monetary Policy Statement (MPS).

We only see its forecasts periodically, when it releases an MPS every three months or so.

The next one of those isn’t due until early September, but you can bet it too has reduced the inflation estimates in its internal models.

This is all great news for commuters, households and the economy in general.

We’re seeing a slight reprieve at the pump, which will hopefully limit cost pressures across other goods and services.

Inflation expectations should soften, giving businesses the breathing space to get back to making decisions.

It also gives the Reserve Bank an out, if it wants one.

With US crude prices lower and hopes of an end to the conflict, an OCR hike on 8 July looks to be less of a sure thing.

A move is still likely, given the energy that has gone into the setup to prepare us all for one.

However, the Reserve Bank will be able to move a lot more cautiously after that and the OCR peak could be quite a bit lower than we expected back in the depths of April.

The central banking landscape has also shifted overseas.

We saw the Federal Reserve in the US enter a new era last week with Kevin Warsh as Chair.

There was some tough talk in his first press conference, as Warsh looks to overhaul many aspects of how the Fed operates, communicates and makes decisions.

Some of that is long overdue, and it should make for a more credible institution in the years ahead.

Investors might’ve glossed over some of this in their haste to focus on the “dot plot” of individual member forecasts.

Warsh has never been a fan of this approach, so he didn’t submit a dot himself.

That might’ve undermined the value of everyone else’s dot and it’s an indication the Fed will move away from this communication method.

Markets see a rate hike as early as September in the US, with odds moving in the opposite direction to what we’ve seen in New Zealand.

That’s understandable with US inflation now in the fours, although if the recent retrenchment in oil prices holds we should see this fall back in the months ahead.

A few different balls are up in the air across the central banking world, and change is afoot. We’ll get a useful sense check in a fortnight from Reserve Bank Governor Dr Ana Breman and her colleagues, while the evolution of the Fed will be a longer-term theme to monitor.

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