Iran war: Reserve Bank Governor abandons her original speech notes

2026-03-23 - 22:03

Analysis: The Governor of the Reserve Bank was going to talk about the current economic outlook, and outline how the Reserve Bank is working to modernise the country’s payments system. But a few days out, she changed tack. Instead, she’s taking the podium to reassure the public that New Zealand banks can withstand severe geopolitical shocks. Dr Anna Breman is speaking to Business NZ on Tuesday afternoon about how the widening Iran and Middle East war will impact the New Zealand economy. It comes as credit agency Fitch Ratings puts New Zealand on a negative credit outlook. The importance of this shouldn’t be understated – despite the finance minister’s attempts to do so. Nicola Willis says the Fitch action is a “reminder” of why fiscal discipline matters; arguably it’s actually a direct criticism of her lack of fiscal discipline in managing down debt. Fitch has kept New Zealand’s core rating grade at AA+ but shifted the country’s outlook from “stable” to “negative”, indicating that New Zealand faces a downgrade and higher borrowing costs from next year if it continues on the current trajectory. Its report warns substantial debt reduction is “becoming more difficult to envisage”, citing delays to fiscal consolidation in recent years. To be clear, this puts New Zealand in unfortunate company. In the past 12 months, only Indonesia, Hungary, Thailand and Poland have been placed on negative outlooks. And Finland was downgraded to AA. The US and almost all Europe are on stable outlooks, for the time being. Today, the repercussions of the oil shock ripple further. ExxonMobil is reportedly delivering on long-running rumours by putting its New Zealand business on the sale block, and Willis is preparing to announce a cash package to help working families with children through the fuel shock. The closest Breman will come to commenting on that imminent package is by acknowledging that Govt fiscal policy – not Reserve Bank monetary policy – is best placed to provide targeted support to households. “Targeted responses must be timely and temporary, to avoid sustained upward pressure to inflation,” she cautions, in language that echoes Willis’s own. During Covid and its aftermath, the Reserve Bank came under fire over-stimulating the economy, contributing to rampant inflation and house price spikes. So all eyes are on the new Governor, and in particular on next month’s official cash rate decision. Will the monetary policy committee raise rates to manage resurgent inflation, or hold them to offset a global economic slump? Breman acknowledges the uncertainty and hardship that many households and firms are experiencing. For now, she is erring towards managing inflation – which may have markets pricing in the chance of a slightly earlier rates rise, but nothing immediate. The two‐year swap rate fell around 5 basis points to 3.56 percent following the speech. “A short-lived disruption and a temporary increase in petrol prices can – and should – be looked through from a monetary policy perspective if it is unlikely to have an impact on medium-term inflation outcomes,” she says. “The picture changes if this disruption is longer lasting; if there are longer-lasting impacts on global productive capacity or domestic demand; or if there is a greater risk of heightened oil and other import prices feeding into higher inflation expectations and inflationary wage- and price-setting behaviour.” Laying out the committee’s decision-making framework, she says the best contribution that monetary policy can make to the wellbeing of New Zealanders is to deliver low and stable inflation over the medium term. “We are likely to see higher headline inflation over the near term, and somewhat weaker growth momentum,” she says. “Getting this judgement right is key to avoiding reacting too early to near-term inflation pressures that monetary policy can do little about – or reacting too late if above-target inflation becomes embedded in the economy. “Most importantly, monetary policy can and should ensure that a temporary inflation spike does not turn into enduring inflationary pressures. The committee will be vigilant to this risk.” Critically, Breman says the Reserve Bank is well positioned to handle the challenges to financial stability caused by the ongoing conflict in the Middle East. She sees no danger of our banks being unable to fulfil their commitments. “There is a risk that global financial stability risks could emerge and affect the cost and availability of funding for New Zealand banks. However, recent stress testing suggests that banks are resilient with strong capital and liquidity buffers, and are well-placed to weather severe geopolitical shocks.” The calm tone of the speech has been welcomed by economists. Westpac’s Kelly Eckhold and Darren Gibbs say there’s little evidence that medium-term inflation pressures have lifted to suggest a need for near-term official cash rate hikes. The duration of the Iran war will be key. They note that this shock has come at a time when the economy was at an early stage of the recovery and excess capacity remains high. “The situation is very different from 2022 when the Russian war impact on inflation added further medium-term inflationary fire to an already hot economy.” ANZ chief economist Sharon Zollner says the Governor is doing what she can to calm the waters by reminding listeners about how central banks react to negative supply shocks such as this, providing reassurance there will be no knee-jerk hawkish response to the inevitable near-term spike in inflation. “We think her calm and considered messaging should be reassuring for markets. However, in this environment, ongoing volatility can be expected.” This analysis was first published in the Newsroom Pro subscriber newsletter. If you’re interested in seeing more content like this, you can subscribe here.