Kiwibank economists are warning that raising interest rates in the current environment would be “tone deaf” and potentially “reckless,” as New Zealand faces rising costs driven by global instability and energy shocks.
In its latest economic commentary, Kiwibank argues the Reserve Bank of New Zealand (RBNZ) should resist calls for rate hikes, citing heightened uncertainty linked to the ongoing Middle East conflict and its impact on fuel prices. (Kiwibank)
Cost Shock, Not Demand Surge
According to Chief Economist Jarrod Kerr and economist Alexandra Turcu, the current inflation pressures are not being driven by strong demand — but by rising costs.
“Both businesses and households are struggling with increased costs, not surging demand,” they state. (Kiwibank)
The bank argues that higher fuel prices and supply uncertainty are already dampening economic activity, reducing spending, investment, and hiring intentions.
Rate Hikes Could Deepen Slowdown
Kiwibank warns that increasing the Official Cash Rate (OCR) in this environment risks repeating past policy mistakes.
“Raising interest rates risks a repeat of past mistakes, potentially inducing a recession. It could be reckless.” (Otago Daily Times Online News)
The economists expect economic activity may already be contracting, although official data is yet to reflect this due to reporting delays.
Data Lag Complicates Policy Decisions
A key concern raised is the lack of timely data available to policymakers.
- Q2 inflation data will not be released until July
- A clearer trend may not emerge until Q3
This means the RBNZ could be forced to make decisions without a full picture of economic conditions.
“We really need to see Q3 data at the very least,” the economists note. (Kiwibank)
Uncertainty Driving Defensive Behaviour
The ongoing geopolitical situation is already impacting confidence across the economy.
Kiwibank notes that:
- Businesses are delaying investment
- Hiring is slowing
- Households are “bunkering down” financially
“The heightened uncertainty is causing businesses and households to bunker down.” (interest.co.nz)
Call for ‘Wait and See’ Approach
Rather than tightening policy prematurely, Kiwibank is urging the RBNZ to adopt a cautious stance.
“Our view is to watch, wait, and weigh up the facts once they have the information in front of them.” (interest.co.nz)
The bank maintains that higher rates are unnecessary to curb demand, as economic pressure is already doing that.
Diverging Views Among Banks
Kiwibank’s position contrasts with other major banks forecasting rate hikes later in 2026, highlighting a growing divide in economic outlooks.
While some institutions anticipate inflation persistence, Kiwibank sees the current pressures as temporary cost shocks rather than sustained demand-driven inflation.
Bottom Line
Kiwibank’s message is clear:
New Zealand’s economy is already under strain from rising costs and global uncertainty.
Adding higher interest rates into that environment may not reduce inflation —
but could tip the economy into contraction.