“Oil shocks are very difficult for inflation-targeting central banks to navigate, because they are both inflationary and negative for growth, thus presenting potentially stark trade-offs,” he said.
“Central banks, therefore, tend to initially look through temporary oil price shocks, but telling the difference between a temporary shock and a more persistent one is never possible at the onset of an event such as this.”
But with annual inflation already running at 3.1% at the end of 2025, the Reserve Bank’s (RBNZ) tolerance for further inflationary surprises over 2026 and beyond would be lower than if inflation were starting closer to the target midpoint, he said.
Worst-case scenario
In a joint research note, Westpac’s Australian and New Zealand teams have assessed the fallout for both nations, based on a variety of scenarios.
They see the net impact of an energy shock as being more serious for New Zealand.
Depending on how wide the conflict spreads and how long it lasts, oil prices could rise to anything from US$100 a barrel to US$185, Westpac said.
“A disruption to Iranian production only could see the price of oil rise another US$25 per barrel to around US$100,” Westpac economists said.
“However, inventory draws, a potential release of strategic reserves and/or an increase in supply from other producers would likely ease concerns and see the price of oil retreat quickly.
But if shipping through the Strait of Hormuz was affected for up to a month, Brent could instead spike to US$113 per barrel.
And a disruption of three or more months could see the price of Brent oil rise to US$185 per barrel, they said.
Westpac noted that the net impact of an energy shock was larger in New Zealand because there were no offsetting export income effects.
In Australia, liquefied natural gas (LNG) and coal prices also rise, partially insulating Australian incomes via higher export revenue and dampening any exchange rate depreciation.
Under the narrower Iranian supply scenario, New Zealand’s Consumers Price Index (CPI) would rise by around 1 percentage point and GDP would be roughly 0.4 percentage points lower.
“With more severe disruptions, the divergence widens,” Westpac said.
“A one‑month Strait of Hormuz closure raises [the] CPI by around 1.6 percentage points and lowers GDP by around 0.5 percentage points.
“A three‑month disruption lifts the CPI by around 3ppts and lowers GDP by around 0.7ppts, reflecting a larger and more persistent squeeze on real household incomes.”
Exchange rate to the rescue
ANZ’s Workman says a prolonged escalation with sustained volatility and a higher geopolitical risk premium would weigh on both global and domestic confidence, investment, and therefore growth.
“Reduced global trade volumes could dampen New Zealand activity and reduce inflation pressure (all else equal),” he said.
“However, it is exactly under these circumstances that we’d expect the NZ dollar to soften, acting as a shock absorber.
A meaningful depreciation would limit the need for the RBNZ to lean against global and domestic activity headwinds with a lower-than-otherwise OCR [Official Cash Rate],” he said.
“If inflation pressures are rising uncomfortably, [that] might alleviate an awkward policy choice.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
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