Things are getting messier and more heated in the Middle East. President Donald Trump has given Iran a 48-hour ultimatum: fully re-open the Strait of Hormuz or have their power plants obliterated. The threat has not gone down well. Iran has swiftly countered back saying that it would target all energy, information technology, and desalination infrastructure in the region belonging to the US and Israel.

The question now is whether the trigger will actually be pulled by either party. We know Trump loves a headline. And the messaging from him, in even just the past week, has been all over the place. From mid-week comments around ruling out a ceasefire, to ending Friday with comments that the US may be close to winding down its military efforts, and now this.

Taking all the escalating threats into account, we expect oil prices to head higher when markets open today. Prices had surged to US$119pb following Israel’s attack on Iran’s South Pars gas field mid‑last week. But we closed the week slightly lower at $112pb after Trumps comments on Friday, though now redundant.

It’s a very fluid situation. With the countdown on, we’ll know more tomorrow. But at least for now, both sides won't back down… and we’re left watching the clock.

Acutely aware of the ongoing geopolitical risks, the RBNZ last week announced a change to the speech topic Governor Breman is set to deliver to the Business NZ’s CEO Forum tomorrow. The speech was originally meant to draw on the February MPS to discuss the current outlook. But communications from the RBNZ last week have confirmed that the speech will now focus on the potential economic impacts for NZ from the ongoing conflict in the Middle East.

Published publicly at 9am tomorrow, a lot hinges on the messaging around inflation and demand risks, and in light of the push higher in wholesale rates. Fears of inflation have markets traders pricing in three rate hikes this year. Rate hikes are completely unwarranted in our view. And we completely disagree with market sentiment. We see hikes as infeasible for the RBNZ, given the immense demand shock that the oil disruption brings to the Kiwi economy. (See our COTW for more).

Taking a leaf from the number of Central Banks taking the stage last week (see our special topic), we expect Breman to acknowledge near-term inflation but emphasize the significant downside risks to growth. And in doing so, push back on wholesale rates… much like she did at the end of last year, and then again at their February MPS. It’s like a scene from Pulp Fiction… we need the “wolf” to hose down the gore in rates markets. “If I'm curt with you it's because time is a factor.”

Our starting point is also a factor. Last week’s disappointing GDP numbers showed we are more sensitive to any shocks, as we’ve struggled to recover for a severe recession. (See our full review). Output lifted 0.2% over the December quarter. And the impressive 1.1% lift in the September quarter was revised down to 0.9%. From the Reserve Bank’s perspective, the softer‑than‑forecast economy to matters. A smaller‑than‑assumed economy implies weaker domestic inflation pressures, with the output gap is closing more slowly than expected. That means less inflation pressure.

Overall, we've managed to produce just 1.3% of growth over the year, just 0.7% on a per capita basis. We're still struggling. And that’s before the sharp deterioration in the outlook over the past three weeks given the conflict in the Middle East. We struggle to see the RBNZ delivering rate hikes to fight off a supply-side shock (they have no control over). The damage to demand outweighs inflation risks.

To end on some good news, we got word last week that, from April onwards, every OCR decision will be followed by a 3pm press conference. Previously, press conferences were reserved for the quarterly Monetary Policy Statements only, and not the smaller Monetary Policy Reviews. We like the move. It’s a genuine improvement in transparency. And that’s what we need, especially key in times of uncertainty.

Financial Markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In rates, yields push even higher

“New Zealand IRS opened the week higher, weekend event risk and an imminent RBA amongst other central bank policy decisions dominating. The curve maintained a mild steepening bias at the start as cash and the implied path provided an anchor of sorts for the shorter dates. Australian OIS pricing continued to lift the implied path ahead of Tuesdays decision with this providing a degree of spill-over into our market, with our implied curve maintaining its priced two-plus 25-point moves by year-end with September fully priced. Policy decisions outside the RBA would in general be described as ‘hawkish holds’, with inflation concerns related to recent developments noted, with the resultant dominant theme in market short-ends being the tightening of policy expectations - an example being the US curve’s removal of previous priced easing by year-end.

As we noted previously, we thought that last week may start to see local factors factoring more heavily into the thinking – particularly for the front of our curve. The RBA, considered somewhat local in this context, provided perhaps the key central bank event for our market in a week of decisions. While market pricing and economists had come down on the side of tightening, we had noted there would likely be a higher element of risk associated with the statement, with the potential for ‘as expected’ alone proving to be a disappoint on the day. As it eventuated, the RBA did tighten, raising the Cash Rate Target to 4.10%, and while the accompanying statement did note that inflation had picked up materially in the second half of 2025 and that the current global situation provided material uncertainties, it was perhaps the 5-4 decision that provides the interest. Following that, domestic Q4 GDP data released on Thursday, and while historic in nature which conceivably involved a degree of asymmetric risk around the print, as if stronger than expectation ‘things have changed’ may have seen an airing. As it eventuated it did print materially weaker than expectation. The headline result further compounded by the immediate prior period downward revision. The question now becomes, does the narrowness of the RBA decision, even given the relative economic position and hawkish rhetoric of late, coupled with the weaker local Q4 GDP out-turn, enable the RBNZ Monetary Policy Committee to adhere to their baseline case cash rate projections as set out in the February MPS where their concerns around the early-stage recovery and cautious household spending came to the fore? This balancing between the growth and inflation aspects may potentially be touched upon at some of the official engagements this week, particularly with the additional pressure applied by markets where implied pricing ratcheted higher to see three 25-point moves priced.

Over the week, we saw IRS higher and flatter, with the front end seemingly particularly vulnerable, with 2-year IRS marked at 3.54% (+21), 5-year 4.05% (+16), 4.40% (+10). With this in mind, the front of the curve may continue to prove interesting particularly with the rapid repricing of the implied path, with this now including a July 25-point tightening as fully-priced, and near 75-points by year-end. The gap between the physical short-end and short-swaps is widening – currently approaching levels seen in the last tightening cycle seen in 2021 through 2023. This seeming disconnect may be worth watching, particularly in light of upcoming RBNZ speaking engagements.” Graham Hughes, Trader – Financial Markets.

In currencies, price action in the Kiwi remains contained

“Aside from NZD/AUD — which, despite an RBA rate hike and a weak Q4 NZ GDP print, held up reasonably well last week — price action in the Kiwi has been relatively contained. NZD/USD continued to respect key technical support at 0.5770/80 (the 61% Fibonacci retracement of the 0.5583–0.6093 move), trading up to a weekly high of 0.5892. With continued mixed messaging out of the Trump White House over the weekend, the Kiwi opens around 0.5820 this morning.

Futures pricing now effectively pushes the next Fed rate cut out to late 2027, although the path remains murky, with a small risk of near term hikes even beginning to creep into pricing. Domestically, around +75bp of tightening is now priced by December. The relatively directionless price action across FX can largely be attributed to a broad, parallel lift in global yields across most G10 majors, helping to explain the Kiwi’s resilience. In almost any historical context it should be in the toilet; however, times have changed, and with any easing in geopolitical tensions, risks are starting to look increasingly asymmetric to the upside.

From a technical perspective, initial support from an emerging uptrend off the mid March low around 0.5800 will be watched closely into Monday’s open, with 0.5770/80 the major downside level for the week. On the topside, 0.59 looms as the broader resistance level to be cleared. While it’s tempting to suggest that upcoming event risk — including the Breman speech and potential US escalation — could prove pivotal for the Kiwi’s broader structural outlook (with a break of either 0.5770 or 0.5900 providing the signal), in the current environment it would be no surprise to see the Kiwi continue to mind its own business, staying out of harm’s way and quietly hunting for worms in the South Pacific.” Hamish Wilkinson– Senior Dealer, Financial Markets.

Weekly Calendar

• Domestically the focus is on Governor Breman’s speech and address to the Business NZ’s CEO Forum which will be published on the RBNZ’s website at 9am tomorrow. The speech is set to focus on the potential economic impacts for NZ from the ongoing conflict in the Middle East. Taking cues from some of the central banks last week, we’d expect Breman to rightly acknowledge higher near‑term inflation but more importantly put emphasis on the significant downside risks to growth – especially in our context of spare capacity and weak demand. In doing so, we’d again expect Breman to push back, much like she did at the end of last year, on both the scale and timing of the hikes currently priced in by markets which have set wholesale and subsequently retail rates higher.
• Offshore, we’ve got a run of inflation prints this week — all for February, so don’t expect to see any impact from the recent lift in fuel prices yet, given the conflict only broke out right at the end of the month.

- First up we’ve got Japan tomorrow: Headline inflation is expected to hold steady at 1.5% helped by energy subsidies. Meanwhile core inflation is expected to edge up from 2.6% to 2.7% driven by higher labour costs alongside a weaker yen feeding through onto higher tradable inflation. It’s worth noting a higher core read could see market pricing for a rate hike in April extend beyond the 60% currently priced.

- We’ve then got Aussie inflation out on Wednesday. Both annual headline and core inflation are expected to hold at 3.8% and 3.4% respectively, keeping above the RBA’s target. The near-term risks from here are tilted to the upside given higher fuel costs.

- And later on Wednesday we’ll also see inflation data for the UK where after a 0.5% fall in prices in January, a 0.4% rise in prices is expected for February. Such a lift would keep annual headline inflation steady at 3%. The irony is that lower fuel prices over the past year are still a big driver of disinflation though that’s something that will almost certainly reverse in the coming releases. However, there’s also an expectation of some cooling in services inflation over the year to February.