Israel and Iran have launched deadly attacks on each other over the weekend. Photo: AFP / Menahem Kahana
Conflict in the Middle East could lead to increased prices for New Zealanders and inflation headaches for the Reserve Bank, even while the economy remains weak.
Israel and Iran have launched deadly attacks on each other since Friday, and BNZ chief economist Mike Jones said it could have flow-on effects closer to home.
"From a macroeconomic perspective, in addition to the general drop in global risk sentiment, we are watching oil and currency markets closely," he said. "Oil prices have spiked aggressively higher and the NZD has dipped slightly.
"Oil prices are within the range of the past year, but the sudden lift over recent days is large. If such moves were to persist or extend, it would place upward pressure on local fuel prices and raise the threat of CPI inflation breaching the three percent top of the RBNZ's target band."
He said medium-term implications were less clear.
"Beyond the direct upward influence, higher fuel prices would also be a drag on disposable income. That will hit demand and would generate disinflationary pressures in other areas.
"The medium-term assessment suggests the RBNZ can look through volatile oil price moves. However, we are wary that the bank may be less willing to do so, as it already appears nervous around a tick up in inflation expectations."
He said BNZ had not changed its forecast for the OCR track.
"Our OCR forecast remains for further easing, specifically for two more 25 basis point cuts in July and August."
Infometrics chief economist Brad Olsen agreed the oil price increase had been significant and would probably lead to price increases here.
"You've seen oil prices jump - depending on the mix - about 10 percent over the end of last week/start of this week so far."
He said the fact the conflict was ongoing, rather than a one-off attack, made it more likely to have an impact.
"Israel seems to suggest this is potentially part of… deliberately attacking energy-based infrastructure, primarily on the nuclear side, sure, but I think it heightens the risk that the market sees this as a longer-term and broader risk to the region and energy supplies.
"If that's the case, you might well see these price increases that have been coming through in the market sustained at a higher price for longer.
"If you'd seen prices spike on Friday and then no further conflicts, the markets might well have settled back and, you know, nothing to see here. The fact that the attacks have continued on both sides and are likely to continue… suggests that the pricing changes the markets have brought through are likely to persist for longer."
He said oil prices had been lower more recently, which helped, but it suggested the economy could get into the position where inflation was more persistent at a time of weaker economic activity.
"It's not the stagflation of the 1970s, but it does start to make you wonder if this is the 2020s version of stagflation."
He said if shipping was targeted more widely or other countries became involved, there could be a broader economic response.
"It would be a general worry that this was turning into a larger conflict. The conflict we've got at the moment is clearly awful… but it also, for the moment, is slightly more contained than the worst-case scenarios for the Middle East."
He said geopolitical instability had a significant impact on the global and local economy.
"None of these are economic factors of demand directly, they're very much integrated with how supply chains will go and how geopolitics now evolves will have a real influence on how economic outcomes evolve."
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