Kiwi Dollar Holds Losses Amid RBNZ Cautious Tightening Path

The New Zealand dollar stabilized around $0.585 on Thursday but held most of the previous session’s losses amid a dovish tilt in the Reserve Bank of New Zealand’s policy projections. The central bank raised its official cash rate by 25 basis points to 2.75% on Wednesday, marking a second consecutive hike and bringing the rate to its highest level in more than a year. The move was widely expected as policymakers continued to address above-target inflation. Although the RBNZ indicated the cash rate may need to increase further, its forward guidance was interpreted as more cautious than markets had anticipated, triggering a sharp selloff in the kiwi. Governor Anna Breman also stressed that there is no predetermined path for monetary policy and that the timing of any further rate hike remains highly uncertain.

The New Zealand dollar fell to around $0.581 on Wednesday, its lowest level in nearly five weeks, as the Reserve Bank of New Zealand delivered a second consecutive rate hike but signaled a more measured pace of further tightening. The RBNZ raised the official cash rate by 25 basis points to 2.75%, as widely expected, stepping up efforts to curb inflationary pressures and reaffirming its commitment to returning inflation to its 1%-3% target range. Its latest projections point to the policy rate reaching 2.81% by December and 3.15% by the end of 2027, lower than market expectations for a peak of around 3.5%. Governor Anna Breman said the OCR trajectory is broadly consistent with the May forecast, while indicating that further rate increases are likely but the timing remains highly uncertain. Swaps data showed that the probability of an October rate hike fell to around 36%, down from 65% before the meeting.

The New Zealand dollar slipped to around $0.59 on Tuesday, hovering at a two-week low, as cautious investor sentiment overshadowed expectations of a rate hike at home. Global bond yields rose to multi-decade highs as concerns over higher inflation fueled expectations of a Federal Reserve interest-rate increase later this month, curbing appetite for riskier assets. At the same time, fresh fighting in the Middle East also pressured currencies of economies exposed to higher energy costs. Limiting the kiwi’s losses, the Reserve Bank of New Zealand is widely expected to raise its official cash rate by 25 basis points to 2.75% on Wednesday. Markets also anticipate the OCR to reach around 3% by December and 3.5% next year, particularly after the central bank signaled that monetary policy needs to become less accommodative.