So what does this mean for our interest rates? 

Just as we were becoming accustomed to a steady stream of interest rate cuts, the tide has begun to shift. In February, the Reserve Bank held the Official Cash Rate steady at 2.25 percent, signalling it wants to ensure inflation is firmly under control.

Now complicating the outlook is escalating conflict in the Middle East. While it may feel geographically distant, tensions in the region are already rippling through the global economy. Iran’s chokehold on the Strait of Hormuz, a narrow waterway through which around 20 percent of the world’s oil supply passes, has disrupted energy markets and pushed fuel prices higher.

The impact is being felt here at home. The price of 91 petrol has climbed above $3 a litre, lifting household expenses and business costs alike. As transport and production costs rise, those pressures risk feeding back into inflation.

Against that backdrop, the Government has outlined a “worst-case scenario” that would see inflation climb to 3.7 percent - well above the Reserve Bank’s 1–3 percent target band.

There were already OCR hike expectations during February’s monetary policy statement, and that was before the Middle East conflict, but Kiwibank Chief Economist Jarrod Kerr says the new Reserve Bank governor Anna Breman did a great job of pushing back on those.

“There are a few voices out there that are incredibly unhelpful by automatically calling for rate hikes every time they see something change. One of them was calling for a rate hike in May, so she hosed down those expectations quite nicely.”

“Now we're seeing all this confusion and we're seeing rates lifting a little bit which I think is a natural response to fears of inflation, but I think we're going too far again.”

Kerr says looking ahead to April’s OCR announcement he believes it’s too soon to do anything yet.

“That scenario is just being blown out of the water with this geopolitical war offshore.”

“Even though inflation is likely to spike a little bit, the risk to growth, households and business from any hikes outweighs that.”

Kerr says it’s important to remember that the Reserve Bank’s mandate is to keep inflation stable in the medium term but ultimately they’re targeting future inflation and not a blip in that pathway.

SO WHAT WILL THE RESERVE BANK DO NEXT MONTH?

Kerr believes it would be an error for the Reserve Bank to hike the OCR based on petrol prices, despite the inflationary pressure it’s bringing.

“We all know that a spike in petrol acts more like a tax on consumption than anything else.”

“If you ask any owner of a petrol station, they'll tell you that when there's a spike in petrol that people go in, they fill up their car, they walk in, pay the bill, and head straight back to the car, whereas two weeks ago, they would have gone in, bought themselves a chocolate bar, a coffee, and a muffin as well.”

But what Kerr does admit is that the conflict couldn’t come at a worse time for our economic recovery.

HOW MUCH WILL IT EFFECT THE RECOVERY?

He believes we haven’t seen the worst of it yet.

“This war is worse for the petrol market than the invasion of Ukraine, and I could definitely see the price of oil spiking quite a bit from here.”

Kerr says he’s now asking at what point does the reaction from the financial markets force the US to stop the invasion?

“I don't think we're there yet, but I think we will get there.”

“We're all in the back of our minds thinking, you know, maybe it’s a four to six week thing, and we’re hoping that eventuates because anything longer than that can be quite problematic for financial market oil.”

While Kerr says in the short-term we shouldn’t feel nervous about the OCR, that if the war rages on that’s when we might see some movement.

“But for now, if anything, it's going to be like the start of the war in Ukraine, where businesses will say ‘I don't know what this means, I'm going to postpone my decisions’ and it will make the recovery worse.”

WHAT ABOUT THE REST OF THE YEAR FOR RETAIL RATES?

Kerr says it’s obvious we hit interest rate lows in November last year.

“We're not a lot higher now than we were then, and I think that they will still probably remain relatively stable over the year ahead.”

“There's forces to the downside and there's forces to the upside, but I think mortgage rates should just drift sideways this year.”

He says that households shouldn’t be worried about a sudden spike, but equally they shouldn’t be waiting for rates to fall either.

WHAT ELSE SHOULD WE KEEP AN EYE OUT FOR?

Kerr says right now first home buyers are really active, and while there’s increased activity from investors that they are still remaining cautious especially with the election looming.

“They're really worried about a capital gains tax and they're really worried about losing their interest deductibility with a change in government.”

As for prices?

“What we're seeing in the market is quite a bit of stock still there, but I'm hearing that it's actually really good stock.”

“But it needs to turn over and it needs to sell. We need to see that clearing before we start getting a bit more tension around prices.”

Ultimately, after months of steady progress in bringing inflation under control, the road ahead is looking less straightforward with many hoping geopolitical influences will remain shortlived.