Anna Breman, Governor of the Reserve Bank of New Zealand, stated that despite the energy and supply chain disruptions caused by the Middle East situation making short-term prospects more complex, she still expects New Zealand's economy to grow by 2026. In an interview with Newstalk ZB, Breman said that high-frequency data from January and February showed signs of economic activity picking up at the start of the year; although business and consumer sentiment turned more cautious since March, making April's data possibly weaker than before, if the ceasefire in the Middle East holds and fuel prices continue to fall, business activity could still improve, and the economy's performance throughout the year may not be as weak as recently feared by the market.
Breman also emphasized that even if geopolitical tensions ease further, inflationary shocks will not disappear immediately. She noted that this round of external pressure is not only due to oil prices but also includes rising costs in transportation, packaging, and broader supply chain links. Thus, the inflation rate could significantly increase in the coming months and then gradually decline. For the central bank, the critical factor is not the one-time price shocks themselves, but whether these cost pressures further permeate business pricing and wage formation mechanisms, leading to more persistent medium-term inflation.
Policy Background
Just a day before Breman made these remarks, the Reserve Bank of New Zealand maintained the official cash rate at 2.25%, remaining unchanged for the second consecutive time. The central bank's policy statement indicated that the Middle East situation has substantially altered the distribution of inflation and growth risks in New Zealand since the February monetary policy statement; in the short term, inflation will rise, while economic recovery will be constrained. The committee stated that keeping interest rates unchanged strikes a balance between "proactively addressing medium-term inflation risks" and "avoiding unnecessarily suppressing economic recovery."
This suggests that the central bank's policy focus is shifting from previously supporting recovery to being more vigilant against a resurgence of inflation. According to Reuters data, since August 2024, the RBNZ has cut interest rates by a total of 325 basis points in response to weak growth and falling inflation; however, the current inflation rate is still at 3.1%, above the target range of 1% to 3%, and the central bank expects inflation to rise to 4.2% by the second quarter of 2026. Official statements show that if inflation cannot be ensured to return to the 2% target median in the medium term, the central bank may need to "decisively and promptly" raise rates.
Economic Recovery
According to published data, the New Zealand economy, though out of recession, still shows limited recovery strength. Reuters cited official data indicating that New Zealand's GDP grew by 0.2% in the fourth quarter of 2025, below analysts' expectations of 0.4% and weaker than the Reserve Bank of New Zealand's previous forecast of 0.5%; Stats NZ also reported GDP growth of 0.2% in the December quarter of 2025, down from 0.9% in the previous quarter. This indicates that while economic activity is indeed improving, the foundation for recovery remains weak, inadequate to fully withstand shocks from oil prices, external uncertainties, and a relatively tight fiscal environment.
Breman's stance also reflects the typical policy dilemma currently facing the central bank: On one hand, domestic demand remains weak, and there is still idle capacity in the economy, theoretically limiting the ability of enterprises to fully pass higher costs on to end prices; on the other hand, if energy and shipping costs remain high and further fuel inflation expectations, New Zealand may once again face the unfavorable combination of "slowing growth but rising prices." The RBNZ's April policy minutes have already explicitly warned that in extreme scenarios, inflation could even be significantly higher than current forecasts, and output could be notably lower than expected.
Market Reaction
The market's interpretation of the central bank's latest stance tends towards hawkish. The ceasefire news briefly pushed international oil prices down, also boosting the performance of the New Zealand dollar; Reuters reported that Breman played down the possibility of an immediate rate hike at a press conference, but also acknowledged that the committee had discussed whether policies should be tightened earlier to reduce the risk of being forced to raise rates more significantly in the future. Following this statement, New Zealand's 10-year government bond yield fell 7 basis points to 4.673%, but had moved off the intraday lows, while the New Zealand dollar continued its post-ceasefire rally, briefly rising to 0.5829 US dollars.
Economists are also starting to reassess New Zealand's policy path in the coming months. Reuters reports indicate that all 32 surveyed economists expected the central bank to keep rates unchanged before the April meeting, but as the Middle East conflict heightens external inflation risks, market bets on subsequent rate cuts have noticeably narrowed, with some institutions even beginning to discuss the possibility of resuming rate hikes mid-year. For Breman, the most critical observation variables in the coming months will be the trajectory of fuel prices, the degree of supply chain repair, and whether businesses' and households' expectations for higher inflation begin to solidify.
