The Reserve Bank of New Zealand (RBNZ) is expected to keep the Official Cash Rate (OCR) unchanged at 2.25% for a second consecutive meeting, according to Brown Brothers Harriman’s Elias Haddad. Governor Anna Breman has indicated that the bank will update its inflation and growth outlook, with a speech on March 24 warning of 'somewhat weaker economic growth in 2026' compared to the February Monetary Policy Statement (MPS). Breman also signaled that the RBNZ would look through a 'short-lived disruption and a temporary increase in petrol prices' [1].
Despite economic slack, the RBNZ’s policy flexibility is limited due to headline inflation being slightly above the 1 to 3% target range and most measures of core inflation exceeding the target midpoint. Market pricing reflects nearly 100 basis points of expected OCR increases over the next twelve months. Haddad warns that a prolonged energy shock and weak terms of trade will keep the New Zealand Dollar (NZD) defensive against major currencies, with heightened stagflation risk [1].
BNY’s Bob Savage highlights a growing divergence between the NZD and the Australian Dollar (AUD), as markets favor currencies backed by real assets. Despite strong New Zealand commodity prices, NZD is seeing little flow support, while AUD benefits from terms-of-trade gains and reduced hedging. Savage notes that fears persist regarding the RBNZ’s ability to respond adequately to inflation risks, which existed prior to recent events. The divergence in holdings between AUD and NZD has widened to a 40 percentage point spread, measured as a percentage of their rolling 12-month averages [2].
The AUD/NZD exchange rate is significant for New Zealand’s trade-weighted indices, and large moves could impact tradables inflation. Asset owners have reduced AUD hedges while increasing NZD equivalents, driven by differences in policy rhetoric and Australia’s greater benefit from commodity-based terms-of-trade shocks. Savage suggests that if the divergence in AUD/NZD begins to affect spot rates meaningfully, the RBNZ may need to consider a policy response through interest rates [2].
CONCLUSION
Both sources highlight the RBNZ’s constrained position amid elevated inflation and energy shocks, with the NZD remaining vulnerable due to weak terms of trade and limited policy flexibility. The growing divergence between AUD and NZD, driven by market flows and policy differences, could force the RBNZ to reconsider its stance if currency pressures intensify. Market sentiment remains cautious, with significant implications for New Zealand’s monetary policy and currency outlook.