Petrol prices in New Zealand recently climbed above $3 per liter, driven by the Middle East conflict, which is stirring worries about inflation and the economy. Finance Minister Nicola Willis has warned about challenges ahead for the economy but hasn’t sounded the alarm.
Inflation and War-Driven Price Pressures
Diesel and petrol prices in New Zealand have jumped sharply in the last few weeks, with petrol up about 45 to 50 cents a liter and diesel increasing by roughly 72 cents. That adds around $23 to the cost of filling an average car and $36 for diesel vehicles. These spikes are tied to the ongoing hostilities in the Middle East, particularly the US-Israeli military actions involving Iran and the closure of the Strait of Hormuz, a key oil shipping lane.
Finance Minister Nicola Willis acknowledges the strain this places on households. She warned of "acute cost of living pressures" but ruled out cutting the fuel excise tax. Her reasoning? Lower taxes on petrol could encourage higher consumption, worsening supply issues.
Willis mentioned Treasury forecasts that inflation might reach 3.7% if the conflict continues into 2026. "That figure might already be outdated," she noted, emphasizing how quickly events are evolving, making precise forecasting difficult.
Still, Treasury expects the economy to grow at least 2.5% this year, a faster pace than last year.
The government is keeping a close eye on fuel shipments to make sure supplies hold up. Recent reports indicate enough petrol for 57 days, diesel for 49 days, and jet fuel for 47 days are either in the country or en route. Thirteen vessels are already on their way, with three more expected to leave soon. Willis promised more regular updates since some petrol stations have noticed customers buying more fuel.
Budget Surplus Ambitions Face Headwinds
Willis said she’s doubtful the government will hit its goal of a budget surplus by 2026-27. The economy’s weakening growth trajectory, coupled with higher interest rates, is likely to hit tax revenue.
"I wouldn’t describe myself as optimistic about hitting the budget surplus," Willis said in a recent interview. She pointed to mounting economic pressures, including rising unemployment and business retrenchments, driven by the central bank’s elevated interest rates aimed at curbing inflation.
The government aims to cut spending while rolling out a NZ$14.6 billion tax cut package. Part of this includes raising income tax thresholds to address 'bracket creep,' where wage increases push workers into higher tax brackets. The goal is to reward work and encourage economic participation.
Still, Willis stressed that the tax cuts will be fiscally neutral, funded by spending reprioritizations and new revenue measures. Debt levels remain roughly on par with Australia’s, and the government is focused on reducing spending relative to the size of the economy.
Trade Relations and Currency Buffers
Despite tariff threats worldwide, trade with the US is still a strong point for New Zealand’s economy.
Willis highlighted the "balanced and complementary" nature of New Zealand’s trade ties with the US, which include exports like meat and wine, and imports of goods and services. In the year ending March 2024, New Zealand exported NZ$14.6 billion (US$8.26 billion) to the US, making it the country's second-largest export market.
New Zealand is part of the "Five Eyes" intelligence alliance, underpinning a strong strategic relationship with the US and other partners. Willis acknowledged that tariff decisions are the US administration's prerogative but expressed confidence in New Zealand’s ability to handle any challenges.
The New Zealand dollar recently dropped to its lowest point in over two years against the US dollar, trading near 0.5515. This depreciation could help exporters by making their goods more competitive in the global market. Willis noted that the flexible exchange rate will allow for balance despite the country’s significant current account deficit.
Looking Ahead
Ministers meet every day to handle the economic impact of the Middle East conflict, with written updates twice a day and weekly strategy sessions. Willis keeps Cabinet informed on the evolving strategy, which focuses on mitigating supply chain disruptions and maintaining economic stability.
Still, many unknowns remain. How long the conflict lasts, global oil price trends, and domestic economic responses will shape New Zealand’s financial health in the months and years ahead.
As inflation rises and budget surpluses look less likely, New Zealand has a tough balancing act ahead. The government’s response to fuel price shocks and fiscal challenges will be watched closely, as will the resilience of trade relationships and currency dynamics amid global uncertainty.
