The Government has stood up a Ministerial Oversight Group to monitor the fallout from the war in Iran on the economy, Prime Minister Christopher Luxon and Finance Minister Nicola Willis announced on Monday.

With cost of a barrel of Brent crude oil, a key benchmark, surged to $US110 ($185) today, a price hike that will increase costs to motorists and add to cost pressures across the economy, the Government came under pressure to respond to the crisis.

Luxon said the group would focus on fuel and supply chains.

Willis said advice from Treasury, though highly uncertain and dependent on the duration of the war, showed a range of economic scenarios.

If the conflict lasted for three months or more, there would be an inflation impact of between 0.5 and 1 percentage point. There would also be a real GDP impact of -0.2 to -0.4 points.

Willis also took the opportunity to publish Treasury’s “very positive” preliminary Budget forecasts, which showed an economic recovery taking place.

These figures were an improvement on Treasury’s last numbers, published in December.

They showed the economy grew 1.7% last year and was forecast to grow 3% this year and next.

“These positive forecasts were thanks to a combination of low interest rates, historically high export prices, a recovery in tourism and increasing consumer confidence,” Willis said.

Willis noted these figures would likely change as a result of the war.

“That was then, and this is now,” she said.

She said that there was currently no challenge to New Zealand’s fuel security.

Treasury also advised net debt would bet 1.5% lower at the end of the forecast period, which would work at about 44.6% of GDP.

Oil is now nearly 50% more expensive than it was before the United States and Israel began attacking Iran on February 28.

Economists have weighed in, warning the war will weigh on the economic recovery.

BNZ head of research Stephen Toplis lifted his forecast for inflation and described the economic scenario as “the worst of all worlds for the average New Zealander”.

“It’s very disconcerting when you find yourselves revising up your inflation forecasts while the balance of risk is that you will soon be revising downward your growth predictions,” he said.

“It also poses a dilemma for our central bank. Moreover, it’s unlikely to be welcomed by an incumbent Government fighting what looks likely to be a very tight election.”

BNZ still expects that first-quarter inflation will ease to 2.8%, but from there it will rise back to 3% in June and stay there for the rest of the year.

Kiwibank chief economist Jarrod Kerr warned that the oil shock was badly timed for New Zealand’s economic recovery, saying “unfortunately, things are likely to get worse before they get better”.

“A spike in the petrol prices acts like a tax on the consumer,” he said.