Higher oil, higher borrowing costs

Monday, 27 July 2026

EDITORIAL: Brent crude briefly surged back above US$100 a barrel on Friday, reviving fears that higher energy prices will once again feed inflation and affect interest rates around the world. Even if oil prices ease again, the latest spike is a reminder of how quickly events far from New Zealand can affect households, businesses and the Government's finances.

Oil prices had already been creeping higher in recent weeks. Friday’s jump came after renewed attacks by the Iran-backed Houthis on shipping in the Red Sea and more incendiary rhetoric from the President of the United States, Donald Trump. Concerns have continued to grow over the weekend that the conflict could broaden further with Saudi Arabia attacking the Houthi-held city of Hodeidah in Yemen, and the Houthis responding with missile attacks on the US ally. The Wall Street Journal has also reported over the weekend that the airforces of both Bahrain and Kuwait have secretly been in action this month, with retaliatory strikes in Iran.

What until now has largely been a conflict directly involving only the armed forces of the US, Israel and Iran - and Iran’s proxies the Houthis, Hamas and Hezbollah - is creeping towards an all-in regional conflict. There is no obvious off-ramp for any of the protagonists. If the US abandoned the conflict, it will be utterly humiliated by leaving its own security and that of its regional allies worse off than before; Iran in control of the crucial Strait of Hormuz and the Houthis able to endanger the alternative route for oil in the Red Sea.

Even though the price of oil has eased back again, after Mr Trump once again changed his tone and rhetoric, the cold logic of the situation means New Zealand and the rest of the world will continue paying a price that will surely be considerable but nevertheless of an uncertain magnitude. Making any type of plans, from merely whether to fly through the Gulf States to visit Europe for work or pleasure, through to investing in large-scale domestic energy projects, remains difficult.

Already, higher oil prices have lifted inflation expectations, pushed up government bond yields and increased the cost of borrowing across the economy. That affects not only businesses and homeowners but also taxpayers, who ultimately fund the interest bill as the Crown continually refinances its growing stock of debt.

Global bond markets have become increasingly sensitive to inflation risks. Governments around the world continue to run large deficits and issue vast quantities of debt. Greater supply, combined with renewed inflation concerns, means investors demand higher returns before lending money. While bond yields remain below their March highs, financial markets have once again been forced to reassess how quickly inflation will return to target, in New Zealand and elsewhere.

New Zealand is no exception and consumers and taxpayers will feel the pain in multiple ways. May’s Budget forecast the Government would issue about $34 billion of new debt over the coming year. Every increase in borrowing costs adds millions of dollars to future interest payments, reducing the money available for either debt reduction or public services. On Friday, yields on New Zealand’s 10-year bonds were nearly 10% higher than the Treasury forecast in May.

Rising oil prices explain why the Minister of Finance, Nicola Willis, last week indicated to The Post that she may keep the Government's temporary fuel support in place - even if they fall below a $3 per litre rolling average over four weeks - the Government’s stated level for removing assistance. Ms Willis argued that the Middle East situation remained too volatile to assume lower prices would last. Events quickly vindicated that caution. Brent crude surged almost immediately afterwards. But maintaining the “temporary” support only makes her fiscal challenges even greater.

New Zealand cannot influence what happens in the Middle East. It can, however, prepare for the consequences. That means accepting that inflationary pressures are likely to prove more persistent than many hoped, the official cash rate may rise faster than expected and what it costs for both the Government and homeowners to service their debts will be higher than budgeted.

Ms Willis and her Associate Minister of Finance, NZ First’s Shane Jones, were praised earlier in the year for stepping up and leading the Government’s Ministerial Economic Security and Supply Chains Group which confronted the complicated policy questions arising from the Middle East conflict. As anxiety again rises in New Zealand businesses and households along with hostilities, oil prices and bond yields, The Post urges Ms Willis and Mr Jones to again take the lead in providing the reassurance and common-sense policy responses that were so appreciated in the worrying days in March and April.