New Zealand Dollar Extends Gains

The New Zealand dollar edged higher to around $0.588, extending gains from the previous session as mounting inflation concerns outweighed disappointing economic growth. Latest GDP figures came in weaker than expected, underscoring a still-fragile recovery, with economists warning that the outlook faces fresh risks amid the ongoing conflict in the Middle East. Despite this, policy expectations have shifted in a more hawkish direction. Markets are now pricing in a 50% probability that the RBNZ could begin raising its cash rate as early as May, with moves more fully anticipated by September and December. This shift reflects worries that the recent surge in energy prices will push inflation well above the RBNZ’s 1-3% target range for much of the year. So far this week, the kiwi has gained nearly 2%, on track to snap a two-week losing streak.

The New Zealand dollar rose to around $0.582 on Thursday after briefly dipping to $0.578, as investors weighed weak economic growth against rising inflation risks. Data out today showed the economy expanded by just 0.2% in the December quarter, undershooting both analysts’ expectations and the Reserve Bank of New Zealand’s forecasts of 0.4% and 0.5%, respectively. Annual GDP rose 1.3%, missing the 1.7% estimate but coming in above the revised 1.1% growth in the previous quarter. Overall, the data points to a still-fragile recovery, with the Middle East war adding further uncertainty over the 2026 outlook. Last month, the central bank left its cash rate unchanged, with Governor Anna Breman indicating that a hike might only be considered in December as inflation was easing. However, the recent surge in energy prices is now expected to push inflation well above the RBNZ’s 1-3% target range for much of the year, prompting traders to price in rate increases in both September and December.

The New Zealand dollar traded around $0.585, holding its rebound from a more than seven-week low, as markets continued to assess the likelihood of an RBNZ rate hike this year. Surging oil costs linked to the ongoing Middle East conflict are beginning to be felt in New Zealand, pushing up petrol prices and airfares. As these pressures build, several economists suggest the central bank may need to raise interest rates earlier than previously expected. Markets are already reflecting this possibility, with investors largely pricing in a 25 bps rate hike in September and assigning more than a 70% probability to another increase in December. This contrasts with the RBNZ’s own view, which suggests that a rate hike by year-end is not fully incorporated in its outlook due to the weak economic backdrop. Investors are now awaiting the Q4 GDP data due this week, which could cloud the rate outlook as quarterly growth is expected to slow sharply.