Any energy shock from the ongoing conflict in the Middle East is likely to drive a larger inflation and growth hit in New Zealand in comparison to Australia due to structural differences, according to a Friday note by BofA Securities.

Risks skew towards a more protracted and costly conflict in the Middle East, and the longer the conflict lasts, the greater the upside risk to oil, liquefied natural gas (LNG), and broader energy-linked prices.

Australia is a net energy exporter facing a positive terms-of-trade shock, against a backdrop of above-target inflation and a positive output gap. On the other hand, New Zealand is a net energy importer facing a negative terms-of-trade shock, with inflation near the top of the target band, but significant excess capacity.

A tighter labor market, sticky inflation, and nominal income gains from commodity exports mean the Reserve Bank of Australia is expected to be primarily focused on upside inflation risks, reinforcing the case for further tightening in 2026. The analysts expect the central bank to hike 25 basis points in May to 4.35% with a front-loaded hiking cycle.

New Zealand faces a larger negative growth drag, which, given greater import dependence and spare capacity, should outweigh the near-term inflation impulse, keeping the Reserve Bank of New Zealand on hold through 2026.