NZD/USD: Split decision at RBNZ clouds path for further easing

• RBNZ cut OCR by 25bp to 3.25%, as expected
• One member voted to hold, adding hawkish tone
• Rising inflation expectations noted
• More rate cuts likely, downside risks seen abroad
• NZD reversed lower before rebounding on split vote

Summary

The Reserve Bank of New Zealand (RBNZ) cut interest rates and signalled a need for additional policy easing compared to three months ago. However, the decision was not unanimous, and its language on inflation was noticeably firmer, putting a hawkish tinge on the move.

Cash Rate Cut, Not Unanimous

The RBNZ delivered a 25bp cut in the cash rate to 3.25%, as was fully priced by markets. The surprise came from the meeting discussion, with the final decision coming down to a choice between holding the cash rate steady or cutting by 25bp—ruling out a supersized 50bp move.

“The case for lowering the OCR [cash rate] to 3.25% highlighted that CPI inflation is in the target range and there is significant spare capacity in the economy,” the minutes said.

“In considering the merits of holding the OCR unchanged at 3.50%... some members noted that this would allow the Committee to better assess whether increased economic policy uncertainty was having a noticeable impact on household and firm behaviour.

“An unchanged OCR could also further consolidate inflation expectations around the target mid-point, and guard against the risk of higher-than-expected inflation from the supply-side effects of increased tariffs.”

Adding a hawkish twist to the decision, only five members voted to cut, with one opting to keep the cash rate unchanged at 3.5%.

The unexpected split vote saw the New Zealand dollar and short-dated interest rates reverse initial kneejerk declines, overriding what was otherwise a more aggressive rate cut profile than three months earlier.

RBNZ Rate Track Forecast Lowered

Source: RBNZ

The RBNZ lowered its rate track forecast, indicating further cuts are likely beyond the move in May. The cash rate is now seen bottoming at an average of 2.85% in Q1 2026—some 25bp lower than projected in February. It implies policy may need to move into mildly stimulatory territory this cycle.

Hinting that U.S. trade policy will be a key swing factor for the cash rate, the Committee discussed two scenarios for the domestic economy, labelled “negative” and “more negative”. Despite the framing, the “negative” scenario suggested a higher cash rate would be needed from December to return inflation to the 2% mid-point. Under the “more negative” scenario, the opposite applies—a lower rate would be necessary.

Source: RBNZ

Inflation Tone Firmer

Reflecting uncertainty stemming from shifting U.S. trade policy, the RBNZ struck a more dovish tone on the global outlook, although it was firmer on inflation and the domestic economy.

While it acknowledged core inflation is falling and spare capacity remains, it noted inflation expectations among firms and households have “risen”. On the local economy, it said it is “recovering after a period of contraction”, with “high commodity prices and lower interest rates” supporting overall activity.

Markets Trim Rate Cut Bets

Following the statement and updated forecasts, swaps markets trimmed the odds of the cash rate falling below 3%, with rates now expected to remain on hold at the RBNZ’s July meeting—though pricing suggests it will be a close call. While the risk of a move to 2.75% is still partially priced following quarterly inflation prints, markets have tilted towards 3% being the likely floor this cycle.

Source: Bloomberg

Still, with so much excess slack in the labour market, it’s debatable whether conditions are conducive for domestic price pressures to rebuild, leaving the door open for the cash rate to move closer to 2.5% to spur private sector activity. We retain that view, and that’s before factoring in risks from offshore.

NZD/USD: Buying Dips Favoured

Source: TradingView

NZD/USD reversed course and pushed higher following the rate decision before running into resistance at .5968. Sitting above the 50 and 200-day moving averages, and with both price and momentum indicators trending higher, buying dips remains the preferred near-term strategy. Below trend support from mid-May, buyers may emerge around the 50DMA, 200DMA, and .5850. Above .5968, .6030 stands as key resistance.

-- Written by David Scutt

Follow David on Twitter @scutty