New Zealand's central bank is prepared to raise interest rates decisively if core inflation accelerates, according to Reserve Bank Governor Anna Breman, as geopolitical tensions in the Middle East drive up fuel prices and threaten price stability in the economy.
The warning comes as the RBNZ held its Official Cash Rate steady at 2.25% despite forecasting annual inflation will spike to 4.2% in the June quarter—well above the central bank's target band of 1% to 3%[1]. The central bank specifically targets 2% inflation over the medium term. Breman emphasized that while the bank is monitoring the situation carefully, it will act "decisively and timely" if conditions indicate that higher inflation could take root in wage-setting and price-setting behavior across the economy[1].
The decision to hold rates reflects a delicate balancing act for policymakers. The RBNZ is weighing the risks of medium-term inflation against the need to support economic recovery, which showed signs of improvement in the second half of 2025 but remains fragile[1]. According to Breman, the bank is "looking for second-round effects"—essentially watching whether temporary price spikes translate into sustained inflation expectations[3].
Breman signaled cautious optimism about the economic outlook, telling Newstalk ZB radio that she expects growth to continue in 2026, particularly if geopolitical tensions ease[4]. "If we see the ceasefire holding, if we see the fuel prices coming down, I think businesses will pick up and we can see good numbers this year," she said[4]. However, she acknowledged that even if conditions normalize, some inflationary effects will persist due to broader supply chain disruptions beyond oil prices[4].
The central bank's conditional approach hinges on three key factors: core inflation must remain contained, wage growth must stay subdued, and medium-term inflation expectations must remain anchored around 2%[1]. "If these conditions are not met, decisive and timely increases in the OCR would be required," the RBNZ stated[1]. This framework gives the bank flexibility to respond as new data emerges on how the Middle East conflict affects New Zealand's economy while avoiding premature tightening that could derail the fragile recovery.
