Conflict in the Middle East intensified over the weekend as the US launched strikes on three nuclear sites in Iran. And with geopolitical tensions running high, investors continue to move towards safe haven assets. Reclaiming it’s tested safe-haven status the USD has regained strength seeing the Kiwi dollar trading back below 60c. Meanwhile, oil prices, already a leg higher last week, will likely continue on a path higher as tensions persist. Especially with the situation still fluid and the potential for retaliation by Iran. Markets will be closely watching the next steps in the geopolitical landscape. Particularly around the potential closure of the Strait of Hormuz. But for now, the risk remains tilted toward further downside for the Kiwi as the risk-off sentiment continues.

As the situation unfolds, we’re thinking about the potential inflationary and growth impacts for the global and domestic outlook. Sustained disruption in the Middle East would likely exacerbate energy supply concerns, causing a bout of global inflationary pressures. And in today’s already fragile environment, facing tariff trade disruption and an economy only just emerging from recession, a near-term rise in fuel costs would likely place additional pressure on Kiwi households and businesses, reinforcing downside risks to domestic growth. Like most things these days, we’re hoping for a better outcome to play out… But we must flag the downside risks to the global and domestic outlook.

Overshadowed by the conflict in the Middle East, the US Federal Reserve and the Bank of England also met last week. Both central banks left policy rates unchanged as expected, and signalled a patient approach, awaiting more clarity on the impact of tariffs on growth and inflation.

Here at home, the latest GDP numbers out last week showed the pace of the economic recovery quickened over the start of 2025. Economic activity lifted 0.8% over the March quarter, slightly outpacing our expectation of 0.7% and significantly stronger than the RBNZ’s 0.4% forecast. (See our full report).

It’s nice to have some good news. But we’re holding our horses. The economy remains 0.7% below pre-recession levels. And in the year to March 2025, the Kiwi economy shrank 1.1%. We’re still crawling out of the deep hole we fell into last year. A hole which has been even deeper on a per capita basis. On a per person basis, economic activity lifted 0.5% over the quarter but remains down 1.6% over the year.

Unfortunately, we may be crawling for some time longer. From here out, we’re not expecting to see the same strength seen over summer period sustained. We expect that the damaging effects to growth from tariff volatility and uncertainty have already started to take effect this quarter. And we expect those headwinds to become more evident in the June quarter GDP figures.

More timely economic data are already starting to point to a slowdown. Electronic card spending has softened, and both the manufacturing PMI and services PSI fell sharply back into contraction in May. Weak confidence amid economic fragility and tariff uncertainty is resulting in softening demand. And it’s under these conditions that we’re expecting a weaker Q2 GDP outturn than the strong prints over the summer period.

Financial Markets

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

In rates, the strength of current data dominates the outlook

“Kiwi rates have aligned more with the strength of current data than with the forward outlook. Elevated inflation and a solid NZ GDP print have reinforced expectations that the OCR will remain unchanged in July. Adding to the support for rates, the ongoing mortgage refix wave through June is prompting balance sheets to hedge fixed-rate exposures, helping sustain elevated pricing. Currently, the market has just -5bp of cuts priced for July. The next key data release isn’t due until the QSBO on July 1st. While the RBNZ has previously placed weight on high-frequency and forward-looking indicators, the rapid deployment of 225bp in rate cuts suggests a natural shift toward a more cautious stance. This pause or reassessment phase may be misread by some as a signal that the easing cycle is over.

Overall, New Zealand interest rates are taking a back seat to the disruptive global backdrop. Market moves are being driven more by offshore developments and data flows than local factors. As the Russia–Ukraine conflict shows signs of easing, tensions are escalating in the Middle East introducing yet another inflationary pressure on top of those already present in New Zealand. This heightens the risk of inflation breaking above the RBNZ’s 1–3% target band. When combined with strong starting-point data and the hawkish tone from the RBNZ in May, expectations for a -25bp rate cut in July have been effectively ruled out. Since inflation erodes growth, the key question now is whether the -28bp of easing currently priced into the curve is enough to reignite momentum in the NZ economy. For now, it’s a case of watch, worry, and wait.” Ross Weston, Head of Balance Sheet – Treasury.

In currencies, the US Dollar returns to safe haven status, for now

“Geopolitical uncertainty has ratcheted up, with the US entering the melee between Israel and Iran. While the US dollar has been beleaguered for months, it has returned as a safe haven currency as global uncertainties just keep getting more and more complicated. Last week the Kiwi dollar opened the week at 0.6015, and had a brief run higher to 0.6088, whilst there was still some hope that some kind of ceasefire or at least a de-escalation could be achieved. By Thursday however, the risks around the situation escalated further, and the Kiwi dollar closed the week at 0.5964. Across the week, some important economic data was released and Central Bank decisions took place, but these were broadly sidelined as geopolitical concerns were overarching. The Federal Reserve left rates unchanged, but indicated in their dot plot that they are expecting to cut 50bp this year. But, Powell also commented that nothing is certain in the current environment. There was minimal market impact, with roughly 50bp of cuts this year already priced in by traders. The Bank of England also remained on hold as expected. Closer to home the better than expected NZ Q1 GDP print also failed to have any impact on market pricing, or the currency, with all eyes on the Middle East situation. In the week ahead, we expect to see further appetite for the US dollar, and the Kiwi will likely head lower. We will caveat this with the fact that all of the drivers for the lower Greenback this year, are still of concern. And bearing this in mind, the uplift in the US dollar may be somewhat capped. For now, further Kiwi upside will be off the cards, and we will more likely trade in the 0.5900-0.6020 range. NZDAUD has been trading in a tight range already, with domestic data releases having little impact in the current environment. Last week the cross was in the 0.9230-9295 range, and this is likely to continue in the week ahead.” Mieneke Perniskie, Trader - Financial Markets.

Weekly Calendar

• The data calendar is light this week, domestically and abroad
• Across the ditch, monthly Aussie inflation data is expected to show the headline rate cool slightly to 2.3%yoy from 2.4%yoy. Consumer price inflation is expected to be unchanged at 2.4%yoy. Rising food prices will provide a boost, but likely offset by lower fuel prices. More importantly for the RBA, core measures of inflation should stay within the RBA's 2-3% target range.
• Several central bank officials are scheduled to speak this week, against the backdrop of rising geopolitical tensions and market volatility. We'll hear from the head honchos of the US Federal Reserve, European Central Bank and Bank of England.

See our Weekly Calendar for more.