Reserve Bank holds OCR at 2.25 percent as Iran war clouds the outlook

The Reserve Bank of New Zealand has held the Official Cash Rate steady at 2.25 percent at its Monetary Policy Review today, choosing to look through the inflationary impact of soaring oil prices while monitoring closely for deeper second-round effects on the economy.

The decision marks the second consecutive hold following nine cuts since August 2024 that brought the OCR down from a peak of 5.50 percent. Governor Anna Breman held a press conference following the 2pm announcement.

The overriding factor in today’s decision is the fallout from US and Israeli strikes on Iran, which have closed the Strait of Hormuz for more than a month and sent oil prices sharply higher. New Zealand, which imports all of its refined fuel, is acutely exposed to the disruption.

Annual consumers price inflation stood at 3.1 percent in the December 2025 quarter — slightly above the Reserve Bank’s one to three percent target band. Economists expect oil price pressure to push inflation higher in the near term, but the central bank’s position is to treat this as a temporary supply shock rather than a reason to tighten monetary policy while the economy is still recovering.

Stephen Toplis, BNZ Head of Research, told RNZ it was “a nightmare time for central banks and economic forecasters.” His summary of the appropriate stance was blunt — “if you know nothing, do nothing.”

Jane Turner, ASB Senior Economist, said the Reserve Bank faces “a horizon shrouded in uncertainty, with risks skewed to the downside.” ANZ Business Confidence fell 27 points in a single month in March — from 59.2 to 32.5 — one of the sharpest monthly declines on record as firms absorbed the oil price shock.

The NZIER Monetary Policy Shadow Board unanimously recommended holding at 2.25 percent, citing “the high degree of uncertainty over the oil price shock in the wake of the US-Israel war against Iran, when the New Zealand economy is still recovering.” Two members noted the Reserve Bank “now faces an even tougher balancing act in supporting activity while containing inflation.”

Markets are now pricing in a 25-basis-point OCR rise in September and a further increase by year-end — a dramatic reversal from just months ago when further cuts were still on the table. Diesel prices are expected to exceed $4 per litre this week, and households face an estimated $55 per week rise in living costs this year partly as a result of the Middle East conflict.

The majority of NZIER Shadow Board members expect the OCR to rise to between 2.50 and 3.00 percent over the next 12 months if second-round inflation effects materialise.

Do you think the Reserve Bank is right to hold rates steady, or should it be doing more to ease pressure on struggling households? Share your thoughts in the comments below.