Market Update: How worried should we be about the Iran conflict? Plus, did the RBNZ miss a chance to smash inflation? – Inside Economics – Full Analysis

For the record, I’ve always found “how worried should we be … ” to be the third most frequent question I get asked about the economy.

The first two are typically “what’s going to happen to interest rates?” and “what’s going to happen to house prices?”

“How worried should we be?” is versatile, though. It works for tariffs, market meltdowns, pandemics, inflation spikes and of course, wars.

I sometimes answer the question with another: “How worried do you want to be?”

One’s capacity for anxiety tends to be quite personal and the economy, with all its complexity and contradictions, offers a deep well of opportunity for worry.

There’s usually something going wrong with the economy, and on the rare occasions there isn’t, there are plenty of things that could be about to go wrong.

So to some extent, we have a choice.

That’s a perpetual dilemma for those of us who cover the economy in the media. Getting the tone right was an issue with covering the Global Financial Crisis, the pandemic, the tariff shock and now this conflict.

My feeling – one shared by most of the local economists – is that war and market reaction to this point have been serious enough to cause problems for our recovery.

Economists have revised their forecasts and now expect a higher rate of inflation this year. They see it sticking at around 3% (it’s currently 3.1%), even though we may still see a first-quarter dip when those numbers are released next month.

Debt markets are now pricing in 70% odds of an OCR hike by July and see two hikes likely this year (as opposed to just one before the conflict).

I’ve been accused of being overly gloomy for highlighting this stuff in my commentary, although, obviously, these are the new developments. And this is a newspaper.

But perhaps I should emphasise that I’ve been talking about the risk that the conflict could derail our recovery.

What I’m not saying is that the conflict will derail our recovery.

But the risk is real.

There are many variables, and they change very fast.

The biggest issue is how long this conflict lasts, and for that, we have to rely on the colourful and often contradictory proclamations of the US President.

Donald Trump said the war would last four or five weeks. Then he said he wanted unconditional surrender and that it could be a long conflict.

Then, after the huge oil spike and market sell-off on Monday, he said the war is “pretty much over”.

Who knows where we’re at by the time you read this? It is hard enough reporting financial market volatility when you have to wait for Wall Street overnight.

This week, market prices have surged and eased faster than you can load a webpage.

Greenshoot killer

I certainly hope this is all over quickly. That would mitigate the damage to the local recovery.

As readers of this column will know, I’ve been running a regular Greenshoots watch and reporting signs of economic recovery for several months now.

It is genuinely dismaying to watch the Iran conflict undermine all of that.

In many respects, the pre-war data we see for the next month or so will be redundant.

The war brings a new reality and a new narrative for the economy as we look ahead.

It’s going to take a while for that narrative to settle in.

While we wait, we need to strike a considered balance between realistic concern and unnecessary panic.

Panic is almost always pointless.

There is a real risk that the fallout could be aggravated if businesses and consumers are overly negative about it.

That happened last year with the tariff shock, which stalled the recovery process. The economy contracted in the second quarter.

Hopefully, the recovery we have seen to date is stronger and further advanced than it was this time last year.

Relevant to that is some of the historic data we’ll get in the coming weeks, not least the GDP numbers, due next Thursday.

The stronger the economy looked before the Iran conflict, the more difficult it would be for the global supply shock to knock it off-track.

The RBNZ will certainly still be interested.

So, to answer that big question, how worried should we be?

We should be concerned. We should be braced for a short-term price shock. We should expect higher inflation and interest rates to rise sooner than we hoped.

That may shorten the window for monetary policy stimulus to work its magic.

But we should not despair.

There is good cause to believe the recovery has enough momentum in it to roll through a few months of disruption.

Further delays to the recovery would be wearying, and they would make things interesting as we near the election in November.

But if we hold our nerve, they needn’t stall progress completely.

Elevated inflation

Q: Reading New Zealand’s inflation figures, it is clear they reached a bottom point of 2.2% at the end of 2024 in the September and December quarters. [Inflation] has slowly risen ever since. Through 2025 as inflation rose the Reserve Bank steadily reduced the Official Cash Rate.

The inflation rate has now breached the 3% upper limit and Trumpian adventures in the Middle East add extra inflationary pressures.

Can you explain why the RBNZ was dropping the OCR while inflation was rising and why commentators are not predicting a rise in the OCR despite the upper-limit breach and continuing inflationary pressures?

John O’Neill

A: Hi John, yes I can explain the theory underpinning the seemingly relaxed attitude to inflation.

Whether you think it is reasonable might depend on your attitude to inflation targeting. There are hawks out there who believe the Reserve Bank should have taken a harder line than it has.

You are right that when we step back and look at the inflation path through the past few years, late 2024 does now look like the low point in this cycle.

But the economy was still in terrible shape in 2024. The logic for cutting rates was that, with it performing so poorly, there was lots of spare capacity, which would translate to lower domestic (or non-tradeable) inflation.

To some extent, that has played out. Non-tradeable inflation has continued to ease, from 4.9% in September 2024 to 3.5% in December 2025.

But the easing has been slower than hoped. Compounding things, there have been regulated price increases for rates and powerline charges. Plus, high international commodity prices have pushed international inflation (or tradeable) inflation back up sooner than hoped. That’s before we even factor in the Iran conflict.

Economists expect non-tradeable inflation to have fallen again in the first quarter, which should result in overall inflation falling back into the Reserve Bank’s 1-3% target band.

But from there (as discussed above), things look more precarious.

Ultimately, the view of the RBNZ (and the consensus of most economists) was that the growth rate was bad enough to justify lowering interest rates into what is now considered stimulatory territory.

If the RBNZ still had a dual mandate (to target unemployment and inflation), there would be no question that the cuts were required.

But given the single mandate to keep inflation between 1-3% and the way it has hung around at elevated levels, it seems legitimate to at least ask the question: did we miss the opportunity to really smash it into submission while we had the chance?

Spending data missing in action

Q: Hi Liam

Credit card spending data shows a decline in January (year on year).

Do the numbers include offshore purchases (Temu) and tourism/holiday spend by Kiwis while offshore? Airfares prior are included, of course.

If not, it’s a significant miss in my view.

I’m also interested in why a Government desperate to collect more revenue isn’t collecting GST on Temu and other offshore sites. Seems an uneven playing field for our local retailers, the only winners being courier companies like Freightways delivering the incoming purchases, with revenue up dramatically. Landfill charges will capture some benefit within one to two years of purchase.

Regards

Murray Tait

A: Thanks, Murray. You are right that electronic card transactions don’t capture international online purchases from places like Temu or money spent by Kiwis overseas.

It really just does what it says on the box – measure card transactions with local retailers.

Of course, it also misses cash payments, cheques, or hire purchase transactions, automatic payments or direct debits from bank accounts.

It doesn’t get internet bank account transfers either, which I note seems to be an increasingly popular payment method with young people and small retailers.

Economists have recently noted that there is an increasing divergence between what the electronic card data tell us and the more comprehensive quarterly retail trade data.

That might be because of an increase in both online offshore purchases and internet bank payments.

Electronic card data has an advantage as it is monthly, so it gives us a timely read on consumer spending. But like most data, there is a trade-off between timeliness and quality.

On the GST issue, the Government has made an effort to collect more GST on directly imported retail goods. For example, Temu now adds GST to prices and pays it to the Government.

Whether that’s happening with the vast numbers of smaller online retailers Kiwis buy from isn’t so clear.

Trucking on

ANZ’s monthly Truckometer offers a pretty good guide to levels of economic activity on our roads, with both a heavy vehicle and light vehicle index.

Of course, it is an indicator that is likely to be directly impacted by higher petrol prices in the coming weeks.

But the data for February provides some evidence that activity was continuing to increase and the recovery was building momentum.

ANZ chief economist Sharon Zollner reports that the Light Traffic Index lifted 2.5% in February to be up 4.5% year on year, its strongest annual growth in three years.

The Heavy Traffic Index rose 2.4% in the month. It was up a more modest 2.4% year on year, but with annual growth trending up.

“Light traffic (motorbikes, cars and vans) is generally a good indicator of the state of demand, as opposed to production,” Zollner said.

“It typically provides up to a six-month lead on momentum in the economy, with variation reflecting discretionary spending on outings, movement of couriers and tradespeople etc.”

Meanwhile, heavy-traffic data (mostly trucks, but also buses) tended to provide a steer on production GDP in real time, as it captured both goods production and freight associated with both wholesale and retail trade, as well as export, she said.

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. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”.

For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.