The two-week pause in hostilities sent oil prices tumbling – but economists, the Reserve Bank and the government all agree the crisis is far from over, writes Catherine McGregor in today’s excerpt from The Bulletin.
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OCR firm, outlook shaky
Wednesday was already a significant day for the New Zealand economy before the ceasefire broke. The Reserve Bank held the official cash rate steady at 2.25% but issued a stark warning that the Middle East conflict had “materially altered the outlook and the balance of risks for inflation and economic growth in New Zealand”. The Monetary Policy Committee now projects inflation spiking to 4.2% in the June quarter, up from 3.1% at the end of last year. If inflation rises further above medium-term expectations, the committee warned, “decisive and timely increases in the OCR would be required”.
Finance minister Nicola Willis underscored how fast-moving the situation had become. Much of what the Monetary Policy Committee had based its deliberations on, she noted at a media briefing, was “already out of date”.
Fog of war
The questions still to be answered about the ceasefire are myriad. As The Post’s Luke Malpass writes, “it is not clear at all what the current deal is, or what a negotiated end to the war might be”. In the hours following the ceasefire, Israel has continued to strike Lebanon, claiming the country to their north was not covered by the deal, which mediator Pakistan prime minister Shehbaz Sharif disputes. Meanwhile, only two vessels made it through the Strait of Hormuz before Iran reportedly closed it again, according to the NZ Herald.
For New Zealand, the key issues regard the Strait of Hormuz. Will it actually reopen – and will tankers be willing to use it, given the ongoing risk and related insurance problems? Will Iran’s reported demands for a $US2 million ($NZ3.5m) toll per vessel become entrenched into the global oil trade? And if so, what will that mean for the price we pay at the pump? The full 10-point peace plan, which includes US reparations for reconstruction costs and a lifting of all sanctions, is, Malpass writes, “clearly a non-starter”, though Trump has described it as a workable starting point for negotiations.
Fuel: some relief, but not yet at the pump
Markets reacted sharply to news of the ceasefire. Brent crude fell around 12.5% to roughly $USD95 a barrel, while West Texas Intermediate was down around 16%. Westpac chief economist Kelly Eckhold told RNZ’s Susan Edmunds the oil price drop could be consistent with petrol prices falling about 20c per litre, to roughly $3.30 a litre for 91.
But Infometrics’ Gareth Kiernan urged caution. “There’s still the month-long ‘air bubble’ in the oil supply that needs to work its way through the system before supply conditions can be considered to have returned towards normal,” he said. The Brent price quoted is effectively a futures price for June oil, not barrels physically delivered today – and Asian refining margins (known as the crack spread) have been rising, meaning diesel prices could still go higher before they fall.
Willis herself acknowledged that while NZ prices “typically respond quickly to oil market moves – usually within a week or so”, the current volatility meant “this may take longer in this instance.” Oil and gas facilities across the region have been damaged and will take time to come back online. Even if ships begin transiting freely, the disruption to refinery supply chains means a return to anything approaching normal is, at minimum, several weeks away.
The things unsaid
Prime minister Christopher Luxon welcomed the ceasefire as “the most encouraging news I think we’ve had in this conflict, absolutely”, but said there was “no escaping the fact there will be a hit to inflation and economic growth”. On Trump’s threat that “a whole civilisation will die” – issued just hours before the ceasefire – Luxon would only call it “incredibly unhelpful”, resisting calls to go further.
Foreign minister Winston Peters was in Washington meeting with US officials including secretary of state Marco Rubio when the ceasefire news broke. As new World Bulletin editor Anna Fifield told Toby Manhire on Gone By Lunchtime, Peters appeared conspicuously focused on economics and freedom of navigation, not human rights. “He didn’t raise the continued suffering of 93 million people in Iran, the basis for the war, any of that kind of stuff, which, frankly, as a New Zealander, I find really disappointing, because this rule of law is the thing that keeps us safe and keeps us able to play on something like a level playing field in the international community.”
