Tariffs And Uncertainty Likely To Dampen Medium-Term Inflation Pressures

Global tariffs and economic uncertainty are likely to mean less inflation pressures in New Zealand and a pullback in business investment and household spending, RBNZ Chief Economist Paul Conway says.

However, the economy is currently supported by high export prices and lower interest rates, he says.

In a speech delivered to Business New Zealand in Wellington today, Mr Conway says that as a small, open economy, we are heavily influenced by global developments.

“Being tied in with the global economy helps us prosper. It also means that when something big happens offshore, such as the imposition of tariffs, its ripple effects impact the New Zealand economy,” he says.

The US has made a decisive shift towards a more trade protectionist stance, which is a major change in the global trading environment with significant implications for the global economy, Mr Conway says.

Tariffs may make global supply chains less efficient and could nudge up the cost of imports. This is why tariffs are expected to add to inflation pressures in the US.

But for New Zealand, the main impact is likely to be weaker global growth, which could reduce demand for our exports and lower import prices. Import prices could fall further as other countries redirect their exports away from the US. This is expected to reduce inflation pressures here.

At the same time, uncertainty is elevated, making it harder for households and businesses to plan.

“When businesses aren’t sure what’s coming, they hold off hiring and delay big investments. Households tend to respond to increased uncertainty by putting off big spends or job moves,” Mr Conway says.

“There’s a whole lot of ‘wait and see’ going on out there right now.”

“On net, these developments are expected to slow New Zealand’s economic recovery over mid-2026 and reduce medium-term inflation pressures. This is against a backdrop of strong export prices, especially for dairy and beef, and lower interest rates.

With inflation back under control, the Monetary Policy Committee has cut the Official Cash Rate (OCR) from 5.5% last year to 3.25% now.

As outlined in the July Monetary Policy Review, the Committee sees scope to lower the OCR further if medium-term inflation pressures continue to ease as projected, Mr Conway says.

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