The Finance Minister insists the Middle East oil crisis will only "delay, not derail" New Zealand's economic recovery, as officials take the unusual step of reopening Budget forecasts amid wild swings in global energy markets.
Speaking at a media briefing in her Beehive office, Nicola Willis said Treasury had decided to reopen its economic forecasts ahead of next month's Budget, reflecting the volatility of oil prices since the conflict began.
The separate "scenario" data she presented today was developed last month.
"It's important to note that these scenarios are about what might happen. They are not forecasts of what Treasury think will happen," Willis said.
"What we are presenting to you is a picture of an economy that has been disrupted but not derailed and will continue to grow this year."
After threatening to bomb when the deadline expired, the US President instead permitted negotiations to continue. (Source: 1News)
The minister detailed three scenarios that Treasury developed to estimate the potential fallout from continued disruption to oil flows through the Strait of Hormuz.
A fragile ceasefire between the US-Israel and Iran remains in place, but the critical waterway remained shut to most maritime traffic, with the overall disruption to overseas energy markets expected to be far longer lasting.
The figures ranged from a short conflict with oil at US$110 a barrel to a severe, prolonged disruption with oil reaching US$180.
With Brent crude at US$102 today, Willis said the mildest scenario looked most likely.
Under that model, inflation would reach 3.9%; growth would slow to 2%; and unemployment would hit 5.3%. The worst-case scenario being planned for, which required oil prices to nearly double from current levels, would spike inflation to 7.4% and increase unemployment to 6.6% by mid-2027.
"Uncertainty reigns – we continue to hope for the best and plan for the worst," she said.
Willis told media she considered the worst-case scenario about as likely as predicting the US and Israel's war with Iran itself at the start of the year.
"That's a bit like saying to your readers, the unemployment [rate] could go this high if there were an outbreak of foot and mouth. It's not looking likely right now," she said.
"It's very important that we do give that context to New Zealanders right now, and that we don't present worse scenarios than are likely."
Treasury's core advice, Willis said, was that the economic recovery had been "delayed, but not derailed", with futures markets pricing oil below US$80 by year's end.
Fuel price increases due to the war in the Middle East have added to the pressure on purses and wallets. (Source: 1News)
She said: "It seems highly unlikely that the price of oil would be almost doubling to US$180 this year. That's what that [worst-case] scenario is based on.
"Based on the information I've gathered from trading partners, from global economic experts, but also what the futures market is telling us, that seems extremely unlikely.
"But, you know, at the beginning of the year, if you'd said to me, 'we're going to have a massive conflict in the Middle East, and New Zealanders are going to see the price of diesel double at the pump', I would have said that was pretty unlikely."
Squeeze on Budget 2026 is on
Willis said the Government had been forced to "rework" Budget 2026 to accommodate costs it had not anticipated earlier, including an extra $50 a week for low-to-middle income working families and support for home and care workers.
She said new spending was funded within the existing $2.4 billion operating allowance.
Cabinet will take its final Budget 2026 decisions in the coming weeks.
Footage released by the government showed its armed forces firing at the vessels. (Source: Other)
Willis' briefing to reporters came hours after the Moody's credit rating agency placed New Zealand's AAA ("triple A") rating on a "negative" outlook, warning that risks to the country's fiscal trajectory had increased. It had previously been on a "stable" outlook.
Moody's said a tight monetary policy, higher debt servicing, and weaker growth would add pressure to the economy, along with fuel price increases, inflation pressures, "stubborn" non-tradeable housing costs, utility prices and higher electricity costs.
Willis, also the National Party's finance spokesperson, seized on the rating warning to argue against calls for more spending.
"It should be a wake-up call to any politician in this place who sees the answer to New Zealand's problems is just to spend more," Willis said.
Disputes over shipping in the Strait of Hormuz raises talk of retaliation between US and Iran. (Source: 1News)
"I am very conscious that many New Zealanders would like to see us splashing the cash right now, and I would love to ease the pressure that many people are feeling.
"We simply can't do that responsibly as a country right now."
Pressed on whether the coalition had contributed to the fiscal pressures through decisions such as its tax cuts, Willis pointed to savings across two budgets and accused the previous Labour government of leaving "an out-of-control fiscal situation".
Asked whether the Government was considering more drastic action, such as means-testing superannuation or raising the eligibility age, Willis said the priority was resisting calls to "splash the cash" and sticking to existing fiscal targets.
"You're perfectly articulating the line I have to walk," she told reporters.
Electricity prices, which were up 12.5%, contributed the most to the annual inflation rate, Stats NZ said. (Source: 1News)
Willis said she hadn't seen the most recent updated forecasts.
"They have decided to reopen the forecasts for this year's Budget. That's an independent decision of the Treasury to do so, and I have not yet been briefed on what those final forecasts will be, but they will be what informs the Budget I present to you in May.
"The Cabinet will take our final fiscal decisions at our Cabinet meeting in the next few weeks, and then that will be combined with the Treasury's final economic forecasts and will inform the Budget documents that we present to you," she said.
What does the Moody's warning mean?
A sovereign credit rating is essentially a verdict on how likely a country is to repay what it borrows. Moody's AAA is the top tier, held by just 11 countries, including New Zealand.
Moody's "negative outlook" was not a downgrade of rating, but a warning that one could follow in the period ahead if the country's position does not improve.
Electricity prices, which were up 12.5%, contributed the most to the annual inflation rate, Stats NZ said. (Source: 1News)
The agency pointed to rising government debt – tipped to hit 53.9% of GDP by June 2026 – alongside inflation pressures from the Middle East crisis.
A downgrade would have flow-on effects in the economy — likely to lift the Government's borrowing costs, with additional effects for mortgages and business loans.
Last month, Fitch, another global credit rating agency, also lowered its outlook for New Zealand's economy. Fitch adjusted the outlook in New Zealand from "stable" to "negative," due to difficulty in reducing debt and delayed fiscal consolidation.
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