The Reserve Bank spent the past two years cutting interest rates to coax New Zealand out of its long downturn. A fresh forecast from Westpac says that cycle is about to go into reverse, and the reason is sitting at the petrol pump.
In its June Economic Overview, the bank warned that the country will dodge a fresh recession but limp through a rocky year of weak growth, rising unemployment and stubborn inflation, all of it set off by the surge in oil prices that has followed the conflict between Israel and Iran. You can read the full assessment in RNZ’s coverage of the Westpac overview.
“While we are not forecasting a recession, the economy has been knocked off course by a surge in fuel prices,” Westpac chief economist Kelly Eckhold said. It is a blunt admission from a forecaster that, only a few months ago, was telling clients 2026 would be the year the recovery finally took hold.
The numbers behind that change of heart are sobering. Westpac now expects the economy to grow by around 1.5 percent across 2026, another subpar year well below the rate New Zealand needs to lift living standards. Unemployment is tipped to climb to roughly 5.6 percent as firms freeze hiring rather than take on staff while costs are rising and the outlook is murky. Annual inflation is forecast to push back up into the 4 to 5 percent range and stay above the Reserve Bank’s 1 to 3 percent target band well into 2027.
That inflation forecast is the part that bites households twice. Higher prices erode wages directly, and they also force the Reserve Bank to keep money expensive. Westpac now expects the Official Cash Rate to climb to about 3 percent by the end of this year, with more increases possible in 2027. The OCR currently sits at 2.25 percent, where the Reserve Bank left it in April after a run of cuts. A move back towards 3 percent would mean the central bank reversing course and tightening into a slowdown, an uncomfortable position it has tried hard to avoid.
The trigger for all of this is the Middle East. The conflict that flared in February has repeatedly threatened the Strait of Hormuz, the narrow shipping lane that carries roughly a fifth of the world’s oil, and traders have priced in the risk by bidding crude sharply higher. For a country that imports almost all of its transport fuel, that shows up quickly. Petrol has been hovering around two dollars a litre, and every cent feeds through to freight, food and the cost of simply getting to work.
There is a glimmer of relief in the most recent market moves. Crude oil fell back below 85 US dollars a barrel in the past week as hopes grew that the United States and Iran could be edging towards a deal to reopen the strait. If a ceasefire holds, the worst of the fuel shock could fade and Westpac’s gloomier numbers may prove too pessimistic. Eckhold was careful to flag that the whole forecast hinges on how long the conflict drags on, with stronger growth pencilled in from 2027 if tensions ease.
For now, though, the domestic data is pointing the same way as the forecast. The BNZ-BusinessNZ Performance of Manufacturing Index slipped into contraction in May, its weakest reading in close to a year, a sign that factories are already feeling the squeeze from softer demand and higher input costs. Westpac expects the housing market to lose what little momentum it had built up, and it sees business investment slowing as companies wait for the fog to clear before committing to new projects.
The picture is not uniformly bleak, and that is what makes this moment awkward to read. New Zealand’s export earners are having a banner year, with farm-gate returns at record highs and food and fibre exports tracking towards 64 billion dollars. The rural economy is, for once, the engine pulling the rest of the country along. But the strength in the paddock has not reached the cities and the service economy, where smaller firms are still nursing cash-flow problems left over from last year’s wave of insolvencies. It is a two-speed economy, and the slow lane is where most people live and work.
The next big test arrives within days. Statistics New Zealand is due to release gross domestic product figures for the March quarter, and economists surveyed by interest.co.nz expect growth of more than 1 percent for the quarter. That would confirm the economy had genuine forward momentum before the oil shock landed. The worry is that the March numbers are now a snapshot of a better moment, and that the energy spike will show up as a drag in the June and September quarters still to come.
For households, the practical message is straightforward enough. The era of falling mortgage rates that many were banking on for late 2026 looks less certain than it did at Christmas. Anyone rolling off a fixed term in the next year may find the cheaper rate they were hoping for has not arrived, and budgets already stretched by fuel and food will have little room to absorb it. The Reserve Bank’s next move, and the headlines out of the Middle East, will matter more to the average family budget than almost anything else over the rest of the year.
What do you make of Westpac’s warning, and how are higher fuel prices and interest rates hitting your own budget? Share your thoughts in the comments below.
This article was written by AI, briefed to report the facts, hopefully without some of the bias people bring to the job 🙂
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