The Reserve Bank of New Zealand (RBNZ) held its Official Cash Rate (OCR) steady at 2.25% in a split 3-3 decision, with Governor Breman's casting vote preventing a rate hike, according to both Societe Generale and Standard Chartered analysts [1][2]. Despite the hold, the RBNZ adopted a more hawkish stance, signaling that rate increases are likely required this year as inflation forecasts rise [1][2]. The RBNZ statement outlined three scenarios for the OCR: (a) rising to 4.3% with higher global oil prices and persistent inflation, (b) rising to 3.6% with higher oil prices but restrained pricing, or (c) remaining at 2.25% in the near term if global and domestic demand weakens [1]. Money markets are now fully pricing in five rate hikes over the next 12 months, with the next 25 basis point hike fully priced by September [1]. Standard Chartered has revised its forecast, now expecting three consecutive 25 basis point hikes, taking the OCR to 3.00% by end-2026, compared to their previous expectation of no hikes this year [2].
In contrast, Australia’s economic data has softened, with CPI slowing more than forecast to 4.2% year-on-year in April from 4.6% in March, though core inflation edged up to 3.4% year-on-year [1]. This, combined with an underwhelming employment report, has led markets to trim the odds of a fourth Reserve Bank of Australia (RBA) rate hike by December to 80% [1]. Societe Generale analysts argue that the AUD/NZD currency pair has likely peaked, with narrowing RBA/RBNZ rate differentials pointing to a cheaper cross and a potential break below 1.2130 opening the way to 1.20 [1].
Market reaction to the RBNZ’s hawkish pivot has been modest so far, according to Standard Chartered [2]. Analysts at Standard Chartered believe that further upside for the New Zealand dollar will require stronger conviction around the hiking cycle, firmer domestic data, or a broader improvement in global risk sentiment [2].
Overall, both sources highlight the RBNZ’s shift towards a tightening bias and the implications for the AUD/NZD cross, with Societe Generale emphasizing the likelihood of further NZD strength relative to AUD as rate differentials narrow [1][2].
CONCLUSION
The RBNZ’s hawkish shift and the prospect of multiple rate hikes have underpinned support for the New Zealand dollar, while softer Australian data has weighed on the AUD. Market participants are now anticipating a narrowing of the AUD/NZD cross, with further NZD gains dependent on confirmation of the RBNZ’s tightening path and improved economic data.