New Zealand dollar slips ahead of expected RBNZ cut

The Reserve Bank of New Zealand meets on Wednesday for the first time this year.  The RBNZ lowered rates by a half-point at the last meeting on Nov. 27 and the markets have priced in another half-point cut on Wednesday at 90%, which would bring the cash rate down to 3.75%.  The central bank held rates for over a year but has aggressively cut rates by 125 basis points in the current easing cycle.

The RBNZ has telegraphed its plan to cut rates by a half-point on Wednesday and we could see a limited response from the New Zealand dollar, since the decision has been priced in.  Still, the US/New Zealand rate differential will widen and that could spell headwinds in the near term for the New Zealand dollar, which plunged 13% in the fourth quarter 2024 but has gained 1.9% since Jan 1.

What can we expect from the RBNZ after tomorrow’s anticipated rate cut? The RBNZ’s updated forecasts are expected to show the cash rate declining towards 3 percent, but in smaller increments of quarter-point cuts.  This will depend on the strength of the economy and the direction of inflation.  Another factor which could affect the rate path is the new US administration which has already started imposing tariffs.

New Zealand is vulnerable to US tariffs as the US is its second-largest trading partner, accounting for about 12% of New Zealand exports.  Even if the US does not target New Zealand with tariffs, the trade war between the US and China has clouded the inflation outlook and is will likely hamper global growth.