New Zealand Dollar Hovers at Over 2-Month High

The New Zealand dollar (NZD) has been one of the biggest movers during the Asian trading session following the Reserve Bank of New Zealand's latest policy meeting, said MUFG.

initially fell to an intra-day low of 0.5678 after the RBNZ delivered a third consecutive 50bps rate cut lowering the policy rate to 3.75% but has since fully reversed those losses rising up to a high of 0.5729, wrote the bank in a note to clients.

The New Zealand dollar staged a rebound after the RBNZ signaled that it plans to slow the pace rate cuts going forward, pointed out MUFG. RBNZ Governor Adrian Orr stated that they are likely to deliver smaller 25bps rate cuts at the next two policy meetings in April and May.

More specifically he told reporters that "we are looking at lowering the Official Cash Rate a little bit quicker than what we projected back in November, but that's around 50 basis points by mid this year." The governor went on to add that it "comes broadly in two 25 basis point steps. It doesn't stop there. We have our projection of the OCR being around 3.00% by year end."

The updated forecasts from the RBNZ show the OCR falling to an average of 3.14% by year-end which was lower than the forecast set back in November of 3.55%. The RBNZ's updated forecasts then show the OCR settling at 3.10% in early 2026 where it remains for the rest of the forecast horizon.

The RBNZ has previously estimated that the long-term nominal neutral interest rate currently lies between 2.50% and 3.50%, recalled the bank. The updated guidance has triggered a hawkish repricing in the New Zealand rate market which has moved more into line with the RBNZ's plans for more gradual rate hikes through the rest of this year.

The RBNZ's decision to continue cutting rates reflects more confidence that inflation will be sustained within its 1.0% to 3.0% target range and that core inflation will continue to converge toward the mid-point, stated MUFG. The RBNZ believes that the period of restrictive rates has reduced demand in New Zealand and contributed to lower inflation.

Inflation is expected to pick up in the coming quarters but within the target range and isn't expected to alter the RBNZ's plans for further gradual rate cuts this year, added the bank. The RBNZ's ability to look through a temporary pick-up in inflation is supported by its updated estimates showing more economic slack in New Zealand's economy than it had forecast back in November.

The RBNZ's estimate of the output gap at the end of last year was raised to -1.7% of gross domestic product up from their November estimate of the output gap in Q3 2024 at -1.5% of GDP. If more economic slack continues to open up than the RBNZ is expecting it will increase pressure to lower rates below neutral in the coming years, according to MUFG.

The New Zealand dollar stabilized around $0.571 on Wednesday after initially declining in response to the Reserve Bank of New Zealand’s policy decision and commentary that suggested more cuts were likely.

The central bank cut the official cash rate by 50bps to 3.75%, as widely expected, bringing the total easing over the past six months to 175bps.

The decision came amid signs of moderating inflation, with policymakers aiming to revive a struggling economy.

The RBNZ also flagged further reductions, projecting the cash rate to drop to 3.45% by June and 3.10% by year-end.

Governor Adrian Orr reinforced this outlook, confirming a rate cut in April and then May sounds about right.

The New Zealand dollar weakened to around $0.571 on Tuesday, snapping a three-day winning streak and retreating from a two-month high as investors awaited the Reserve Bank of New Zealand’s policy meeting.

The RBNZ is expected to cut its official cash rate by a supersized 50 bps on Wednesday, bringing it down to 3.75% amid rising unemployment, contracting economic growth, and inflation concerns.

Traders will also focus on RBNZ Governor Adrian Orr’s press conference after the rate decision, which may offer clues about the interest rate outlook.

Speculation suggests the central bank could reduce its base rate by 25 bps at each of the next two meetings in April and May.

Externally, a rise in the US dollar after a three-day decline added pressure, following hawkish remarks from Federal Reserve officials.

The New Zealand dollar strengthened to around $0.574 on Monday, rising for the third consecutive session to a four-week high, supported by a weaker US dollar following a downside surprise in US retail sales last week.

The weak US data has raised concerns about the health of the world's largest economy and led investors to anticipate at least two rate cuts from the Federal Reserve this year.

Domestically, the Reserve Bank of New Zealand is set to meet on Wednesday and is widely expected to cut rates by 50 bps to 3.75%, while signaling a slower pace of reductions toward 3% or 3.25% by year-end.

On the economic data front, New Zealand's Performance of Services Index rose to 50.4 in January from a revised 48.1 in December, indicating a slight expansion in the services sector after ten consecutive months of contraction.

Against a backdrop of growing uncertainty in global politics and trade tensions, there's one apparent safe bet this week: the Reserve Bank of New Zealand cutting interest rates on Wednesday. A 50 basis point reduction in the official cash rate has been well telegraphed by the RBNZ with economists pointing to rising unemployment, contracting economic growth and inflation that is well entrenched with the desired target band as clear reasons to cut again. The biggest fear among economists is that the RBNZ will hesitate, keeping monetary conditions far too tight when the economy needs urgent support. (james.glynn@wsj.com; @JamesGlynnWSJ)

ING said it expects the Reserve Bank of New Zealand to deliver a second consecutive 50bps cut to 3.75% next Wednesday, broadly in line with consensus.

Inflation over the past two quarters has stayed within the 1%-3% range targeted by RBNZ amid a backdrop of weak economic conditions. In Q4 2024, non-tradable inflation slowed to 4.5% year-on-year, faster than the RBNZ had estimated at the November meeting (4.7%) when the central bank had already indicated another 50bps cut as the most likely scenario for February.

Every indicator released since the November MPC meeting has pointed to underlying weakness and a need for relaxing monetary policy, wrote the bank in a note. Business confidence marked a third month in decline while manufacturing PMI continued its 22-month streak of contraction. Consumers were a bit more confident on the back of previous monetary policy easing and slowing inflation but this was largely limited to higher-income groups.

The most concerning indicator was the labor market data released last week, stated ING. Nothing here is good. The unemployment rate rose to 5.1% and is almost at its COVID-19 peak, while the number of job vacancies declined. This combination even saw the participation rate dip as people left the labor force entirely.

The RBNZ has revised its rate cut projections lower multiple times as the economy has cooled faster than expected. This is in stark contrast to the country's nearest neighbor, Australia, which hasn't yet cut, pointed out the bank. Across the Tasman Sea, Australia has positive gross domestic product growth and a steady unemployment rate. It has stickier inflation, but even that is just 0.2% higher than New Zealand.

Markets have put an 85% chance of the Reserve Bank of Australia cutting at its next meeting as well as almost fully pricing in a 50bps move by the RBNZ (45bp in the price). ING predicts the projections to replicate a similar pattern where rates fall to a terminal 3% rate.

However, there are risks of another dovish revision, and the bank thinks the balance of risks is tilted to the downside for the New Zealand dollar (NZD) next week.

The NZD isn't set to receive the same kind of support destined for the euro (EUR) and Scandinavian currencies if a Russia-Ukraine truce materializes in February, added the bank. The United States's aggressive protectionist stance targeting China means ING retains its bearish bias on , at least through the summer.

Explorations below 0.55 are a tangible possibility. By the end of the year, investors could see some relative outperformance of NZD relative to AUD due to less structural — such as export — risk for New Zealand compared with Australia from a China slowdown, according to the bank.