NZ Economists Cut Inflation Forecasts After May Fuel and Airfare Drop but Still See RBNZ Rate Hikes Ahead

The Quick Take

• New Zealand economists trimmed inflation forecasts after fuel prices and airfares fell in May ahead of Middle East peace developments
• Despite lower inflation projections, economists still expect the Reserve Bank of New Zealand to implement rate hikes
• The Iran deal's potential impact on oil prices had not yet been fully reflected in May data, suggesting further downside to NZ inflation

New Zealand's economic forecasting community revised its inflation projections lower after May price data showed fuel costs and airfares retreating, providing relief that predates the potential additional impact of the US-Iran Strait of Hormuz agreement. New Zealand is particularly sensitive to global energy prices given its geographic isolation and high dependence on imported petroleum products, meaning the pass-through from global crude movements to domestic fuel prices is relatively direct and fast. The reduction in inflation forecasts reflects both the May data point and a forward-looking assessment that further disinflation from Middle East peace is likely to compound the May reading.

Despite the trimmed inflation outlook, New Zealand economists maintain their expectation of Reserve Bank rate hikes — a notable divergence that suggests the rate path is driven by factors beyond energy-related inflation alone, including domestic demand strength, labour market tightness and housing market dynamics. New Zealand's housing market has historically been a key driver of non-tradeable inflation that persists even when imported goods inflation falls. This creates a two-speed inflation picture where energy disinflation is happening faster than the domestic components that the RBNZ is most focused on managing through its rate tool.

Watch for the Reserve Bank of New Zealand's next Monetary Policy Statement, which will update its projections for the OCR (Official Cash Rate) path in light of the trimmed inflation data and Middle East developments. Key signals include New Zealand's next CPI print and whether domestic non-tradeable inflation components confirm or contradict the economists' rate-hike base case. The macro variable is the global oil price trajectory — if Iranian supply normalisation drives crude significantly lower, it will accelerate New Zealand's disinflation and potentially shift the rate debate from hike toward pause.

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