NZD/USD falls on dovish RBNZ rate hike

NZD/USD Analysis

The Reserve Bank of New Zealand raised interest rates by 25 basis points, to 3.75% and the highest in a year, in a consensus decision. This was the second straight hike after July's pivot, which ended an easing cycle that started in August 2024 and produced 300 bps of cuts. The committee judged it was "appropriate" to "gradually" remove monetary stimulus, while supporting growth and employment. ^[1]

Price pressures have intensified, making it hard for the central bank to stay on the sidelines. Inflation accelerated by 4.1% y/y in the second quarter, exceeding forecasts and marking the fastest pace in more than two years. The RBNZ expects CPI to have peaked, but does not see a return below 3% this year – the upper bound of its 1%-3% target. ^[2]

Despite being a crude producer, New Zealand is a net importer of oil ^[3], making it vulnerable to the energy shock from the Middle East conflict. US-Iran hostilities continue, and flows remain well below pre-war levels. This means crude prices can keep rising and sustain inflation, keeping pressure on the RBNZ for additional hikes, with updated projections seeing the OCR topping out at 3.2% next year, creating scope for such an outcome.

However, further increases in the near-term may be hard, with OCR seen at 2.8% this year - only marginally above its current level. What's more, policymakers offered dovish guidance, noting that today's move "reduces the risk that the OCR needs to increase by more later", although they kept the door open to more moves.

The central bank is wary of aggressive tightening that would derail a fragile economy and a weak labour market. Officials may be optimistic about a recovery from an expected lack of growth in Q2, but do not expect GDP to exceed 0.5% q/q this and the next quarter. Unemployment rose to 5.6% in Q2, the highest rate in over a decade. While officials view this as the peak level, they see it staying above 5% through to 2027.

NZD/USD dropped after the decision, reacting to dovish guidance that shows limited appetite for more immediate action, as the RBNZ is wary of the impact on growth. It now moves below the EMA200, shifting immediate bias to the downside and leaving it vulnerable to deeper declines. Renewed USDOLLAR strength from rising Fed hike bets, following the hawkish Jackson Hole debut by Fed Chair Warsh ^[4], adds to the headwinds.

On the other hand, the move is now technically stretched, creating scope for an NZD recovery that would keep the 2026 high in the spotlight. The RBNZ kept the door open to further rate increases, and projections point to a higher OCR ahead. Moreover, Fed Chair Warsh did not commit to a September hike, while the USDOLLAR faces challenges from debasement trends amid heightened concerns around ballooning government deficits.