NZD jumps as RBNZ cuts to 2.25% but signals the easing cycle is over
New Zealand’s central bank delivered a widely expected 25 bp cut to 2.25%, the lowest since mid‑2022, but surprised with a guarded outlook that effectively closes the door on further easing. Traders slashed bets on additional cuts, sending the New Zealand dollar higher and front-end rates sharply up.
Market reaction: hawkish cut lifts NZD and front-end yields
The Reserve Bank of New Zealand’s decision matched consensus, but its guidance landed on the hawkish side. The bank said the board weighed holding versus cutting and stressed that subsequent moves hinge on the inflation and growth trajectory. Markets swiftly repriced: the NZD rose about 1% to a one-week high, and two-year swaps climbed as odds of another near-term cut fell from just over 50% to roughly 22%.
FX desks characterized the move as a “hawkish cut,” with the policy path update overshadowing the headline easing. Positioning flips were most visible in NZD/USD and NZD/JPY, while rates traders pared curve-steepening bets as terminal rate expectations edged up beyond mid-2026.
Policy decision and leadership transition
The meeting was the last under Governor Christian Hawkesby before Anna Breman assumes the role in December. The committee minutes showed five of six members backed Wednesday’s cut, but placed notable weight on upside risks to both inflation and output despite significant excess capacity still evident in the economy.
Updated track: lower near term, higher later
The RBNZ now projects the Official Cash Rate at 2.25% in early 2026, rising to 2.65% by late 2027. While the track is below prior forecasts in the near term, the upward slope into 2027 signals a high bar for additional easing. The bank expects inflation to drift back toward the 2% midpoint by mid‑2026.
Macro backdrop: fragile recovery, policy patience
Since August 2024, the RBNZ has delivered 325 bp of cuts to cushion an economy that fell into recession last year. Activity remained weak through mid‑2025, but lower borrowing costs have begun to support household spending. The bank projects GDP growth of 0.4% in Q3 and 0.7% in Q4, while confidence, housing and external demand remain headwinds. Officials flagged trade risks and said rising joblessness is tracking within expectations.
The stance broadly mirrors caution seen at the Reserve Bank of Australia and the U.S. Federal Reserve: both are leaning against premature easing even as disinflation progresses, mindful of upside risks and the need to nurse fragile growth.
What it means for FX and rates traders
For FX, the signal that the easing cycle is effectively over is NZD-supportive in the near term, particularly versus lower-yielders where carry appeal improves. Follow-through will depend on incoming activity data and global risk appetite. In rates, front-end New Zealand swaps may stay sensitive to upside inflation surprises and any evidence of firmer domestic demand, while the OCR track implies a flatter curve if growth stays subdued.
Liquidity conditions around the handover to Governor-designate Breman could inject episodic volatility. Cross-asset correlations remain high: a backing-up of global yields would likely amplify NZD strength, while a risk-off pulse could cap gains even with a more neutral RBNZ.
Key points
- RBNZ cut the Official Cash Rate by 25 bp to 2.25%, in line with expectations.
- Guidance signaled the easing cycle is effectively over, pending data.
- NZD jumped about 1% to a one-week high; two-year swaps rose as odds of another cut fell to 22%.
- OCR projected at 2.25% in early 2026, rising to 2.65% by late 2027.
- Inflation seen near the 2% midpoint by mid‑2026; growth forecast +0.4% in Q3 and +0.7% in Q4.
- Five of six committee members backed the cut; risks to inflation and output seen skewed to the upside.
- Leadership transition: final meeting under Governor Christian Hawkesby; Anna Breman takes over in December.
FAQ
Why did the New Zealand dollar rise after a rate cut?
Because the RBNZ’s guidance was more hawkish than expected. By signaling the easing cycle is effectively over and publishing an OCR track that rises into 2027, the bank reduced the probability of further near-term cuts. That tightening in rate expectations supported the NZD.
Is the RBNZ done cutting rates?
The bank did not rule out future moves, but its statement and projections imply a high bar for additional easing. Markets trimmed the probability of another cut to roughly one-in-five, contingent on how inflation and growth evolve.
What is the RBNZ’s latest OCR projection?
The OCR is projected to remain around 2.25% in early 2026 and increase to about 2.65% by late 2027. This path is lower than previously forecast in the near term but slopes upward over the medium term.
How does this decision compare with other central banks?
It mirrors the cautious tone from the RBA and the Federal Reserve. Policymakers are wary of over‑easing while inflation risks persist, preferring to pause and assess data even as growth remains fragile.
What are the RBNZ’s growth and inflation views?
Inflation is expected to drift toward the 2% midpoint of the target band by mid‑2026. Growth is forecast to improve modestly, with GDP up 0.4% in Q3 and 0.7% in Q4, though confidence, housing and external demand remain notable headwinds.
What should FX and rates traders watch next?
High-frequency inflation prints, labor market data, and any signals from Governor-designate Breman. For FX, watch NZD/USD around key resistance and broader risk sentiment. In rates, front-end swaps will be sensitive to upside inflation surprises that could further dampen easing expectations.
This article was prepared by BPayNews to provide timely insight for currency, rates and macro investors.
