Source: Kiwibank Economics
Kiwibank economists are warning that New Zealand is being squeezed between two dangerous economic forces at once:
- rising fuel and energy costs,
- and a weakening domestic economy.
The result, they argue, is a growing risk of stagflation — the difficult combination of weak growth, rising prices and deteriorating economic conditions.
According to the report, Brent Crude oil prices have stabilised around US$100 per barrel as tensions continue in the Middle East and the Strait of Hormuz remains heavily disrupted.
Kiwibank notes that oil prices remain highly vulnerable to geopolitical headlines and could either surge significantly higher or fall sharply depending on developments between Iran and the United States.
Labour Market Weakness Growing
While rising fuel prices are pushing costs higher across the economy, Kiwibank says New Zealand’s weak labour market is simultaneously creating strong disinflationary pressure.
The unemployment rate eased slightly from 5.4% to 5.3%, but the bank says the improvement masks deeper weakness beneath the surface.
Most notably:
- underutilisation remains elevated at 13%,
- wage growth remains weak at around 2%,
- and large numbers of New Zealanders are still looking for more work hours.
Kiwibank argues this labour market slack reduces workers’ bargaining power and suppresses future wage inflation.
The bank also warns that higher fuel costs are beginning to destroy demand across the economy, with businesses postponing expansion plans and households delaying large purchases or projects due to uncertainty and rising costs.
Economy Likely Contracted in Q2
Kiwibank believes the New Zealand economy likely contracted during the second quarter of 2026.
The report argues the country does not need additional interest rate hikes on top of already weak economic conditions.
While some traders continue pricing in multiple OCR hikes through early 2027, Kiwibank’s economists say:
“We believe we need zero… none… nada. Wait and see.”
The bank warns that higher rates risk adding further pressure to an economy already weighed down by weak confidence, rising fuel costs and slowing activity.
Oil Shock Meets Weak Demand
The core problem outlined in the report is that New Zealand is facing both:
- inflationary pressure from energy costs,
- and falling economic demand at the same time.
Kiwibank says that combination creates an especially dangerous economic environment because traditional monetary policy tools become less effective during stagflationary conditions.
The report notes:
“Higher prices due to the oil crisis, lower demand due to decreased demand in the economy. That’s dangerous.”
Interest Rate Markets Still Expect More Hikes
Despite the weakening economy, domestic interest rate markets are still pricing in multiple future rate increases.
Kiwibank believes markets may be underestimating the scale of economic weakness now developing inside New Zealand.
The bank says business confidence, consumer confidence and labour market conditions all point toward a softer economic outlook.
At the same time, inflation remains vulnerable to external shocks stemming from:
- energy prices,
- shipping disruptions,
- and ongoing geopolitical instability in the Middle East.
NZ Dollar Rises Despite Weak Domestic Conditions
Interestingly, the New Zealand dollar has continued strengthening despite growing domestic economic weakness.
Kiwibank says global risk appetite and broader weakness in the US dollar have supported the Kiwi dollar, with NZD/USD rising 1.6% over the past week.
The report also noted improving momentum in the NZD/AUD exchange rate following the Reserve Bank of Australia’s latest interest rate hike.
Waiting for the Next Headline
Kiwibank’s broader conclusion is that uncertainty now dominates the global and domestic economic environment.
Oil prices remain hostage to geopolitical developments.
Central banks remain uncertain over inflation persistence.
Businesses remain cautious.
Consumers remain under pressure.
And New Zealand’s economy appears increasingly stuck between slowing growth and rising costs.
The bank warns that much now depends on:
- how long elevated oil prices persist,
- whether the Strait of Hormuz crisis escalates,
- and whether weakening domestic demand eventually overwhelms inflationary pressures.