Reserve Bank of New Zealand leaves interest rates on hold despite fuel prices potentially adding to inflation

Australian borrowers could be spared a rate hike next month with New Zealand leaving interest rates on hold despite inflation being above target and fuel prices soaring above $3 a litre.

Despite the worst oil crisis since the 1970s, the Reserve Bank of New Zealand on Wednesday opted to leave the cash rate on hold at 2.25 per cent.

This is despite its inflation rate of 3.1 per cent being above its 1-3 per cent target, with Kiwi central bankers citing concerns about a growth slowdown after emerging from a recession last year.

“The Middle East conflict will result in weaker economic activity in the near term,” RBNZ’s monetary policy committee said after a consensus decision.

“Higher fuel prices are increasing costs, lowering profit margins for many businesses, and reducing household purchasing power.”

The Kiwi cash rate is well below Australia’s equivalent level of 4.1 per cent while New Zealand’s inflation rate at the end of last year was more moderate than Australia’s 3.7 per cent headline inflation rate for February — which was above the Reserve Bank of Australia’s 2-3 per cent target.

Despite having looser monetary policy now, New Zealand’s jobless rate of 5.4 per cent at the end of 2025 was much higher than Australia’s still-tight 4.3 per cent unemployment level in February before the US airstrikes on Iran.

“Households have been cautious in the face of weak real income growth, high unemployment and house price weakness,” RBNZ said.

“Investment activity is also expected to remain weak. There is a risk that household and business caution becomes more pronounced, resulting in higher unemployment and weaker growth.”

Despite New Zealand having lower rates and higher unemployment than Australia, economist Saul Eslake said it made sense for the RBA to keep rates on hold on May 5 should a ceasefire between Iran and the US lead to a fall in crude oil prices.

“If the ceasefire holds, I would say a rate hike is less likely precisely because they’ve done two now,” he told The Nightly.

Average unleaded prices in New Zealand of $NZ3.69 — or $A3.03 — are much higher than Australia’s equivalent of $2.30 with this month’s fuel excise halving to 26.3 cents a litre.

The 40 per cent jump in fuel prices during March was the equivalent of two rate hikes, Mr Eslake said adding cost-of-living relief in the upcoming May 12 Budget in Australia could lead to more RBA rate hikes later this year.

“They might want to see what the Government does in the Budget,” he said.

The New Zealand economy last year emerged from recession after suffering quarters of negative gross domestic product in 2024 and 2025.

“In the near term, inflation is expected to increase and the economic recovery to weaken,” the RBNZ said.

“Many firms reported that higher fuel prices are already being passed through to a range of other prices.”

Despite the risk of another economic slowdown, the RBNZ’s monetary policy committee led by chair Anna Breman declined to rule out raising interest rates again for the first time since May 2023.

“The Committee is vigilant to any generalised inflationary pressure and stands ready to act to return inflation to its medium-term target,” it said.

The Reserve Bank of New Zealand stressed it was still aiming to return inflation to 2 per cent, the mid-point of its target, and suggested increases in the overnight cash rate may be necessary if underlying inflation without volatile price rises and wage growth weren’t contained.

“If these conditions are not met, decisive and timely increases in the OCR would be required,” it said.

New Zealand’s cash rate hit 5.5 per cent three years ago, in the aftermath of COVID, which was much higher than Australia’s post-pandemic peak of 4.35 per cent.

The Kiwis cut interest rates five times last year, compared with Australia’s three reductions.

But their cash rate has been at the same level since November, while Australia has seen two rate hikes in 2026 so far.