The Reserve Bank has decided to hold the Official Cash Rate at 2.25 per cent following its April 2026 Monetary Policy Committee meeting, as rising global uncertainty reshapes the outlook for inflation and economic growth in New Zealand.

This decision is a response to escalating conflict in the Middle East, which has disrupted global supply chains and driven a sharp increase in oil and gas prices. These higher energy costs are now impacting the cost of everyday goods and services, placing upward pressure on inflation both globally and domestically.

Key sectors such as transport, food and air travel face an immediate impact with higher prices expected. The Reserve Bank has updated its short-term forecasts and now expects inflation to reach 3.0 per cent in the March quarter before rising further to 4.2 per cent in the June quarter. However, officials stress that these projections carry a high degree of uncertainty and will depend heavily on how the conflict evolves and how long supply disruptions persist.

While inflation is rising, economic growth is showing signs of weakening. The domestic recovery was already fragile before the recent global developments, with low household spending and subdued business investment weighing on momentum. Higher fuel prices are now adding further strain by increasing operating costs for businesses and reducing purchasing power for households. Many firms report tightening profit margins, while some have begun passing increased costs on to consumers through higher prices or temporary surcharges.

Global financial conditions are also contributing to the cautious outlook. Markets have experienced increased volatility in recent weeks, with rising interest rates in several major economies and a stronger United States dollar. The New Zealand dollar has weakened slightly in response, which can make imports more expensive and add to inflationary pressure, although it may provide some support for exporters.

The Reserve Bank noted that the current situation differs from previous global shocks, particularly those seen in 2022. During that period, strong demand combined with supply disruptions drove inflation higher. In contrast, current demand conditions are weaker, and there is still spare capacity within the economy. This may limit the extent to which businesses can pass on higher costs, which could help contain inflation over the medium term.

The central bank remains focused on its goal of returning inflation to the 2 per cent target midpoint over time. Achieving this will require core inflation and wage growth to remain contained, while longer-term inflation expectations stay stable. The behaviour of businesses and workers in response to rising costs will play a critical role in determining whether inflation pressures persist.

Members of the Monetary Policy Committee discussed whether an early increase in the OCR would help prevent inflation from becoming entrenched. Some members supported a more proactive approach, noting the risk that higher costs could spread more broadly through the economy. Others emphasised the risk of slowing economic activity further, particularly given the already weak growth environment.

On balance, the Committee agreed that holding the OCR at its current level was the most appropriate course of action at this time. The decision reflects a careful weighing of risks, including the potential for higher medium-term inflation and the possibility of a deeper economic slowdown.

The Reserve Bank has made it clear that it remains prepared to respond as conditions evolve. If inflation pressures become more persistent or begin to influence wages and expectations, further increases in the OCR may be required. Conversely, if economic activity weakens more than expected, the Bank may choose to maintain its current stance for longer.

For now, the outlook remains uncertain, with both inflation and growth moving in challenging directions. Future policy decisions will depend on incoming data and the path of global developments, particularly those linked to energy markets and supply chains.