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NZD would strengthen if RBNZ restrains expectations for deeper interest rate cuts.
The Reserve Bank of New Zealand (RBNZ) will deliver a 25 basis point rate cut to 3.25% at its policy meeting on May 28, but analysts say the move could come with a "hawkish" tone that tempers expectations of further easing.
While some market participants anticipate dovish guidance and a downward revision to the RBNZ's policy rate path, economists at UBS are pushing back, citing supportive domestic and global trends.
“The shift to a more ‘pro-growth’ agenda in the government’s budget was selective, with new spending focused on healthcare, defence, and business incentives,” says UBS in a recent research briefing, adding that further stimulus is likely ahead of the 2026 election.
A budding recovery in the housing market, improving purchasing manager indices (PMIs), and a rebound in milk prices are all helping to lift sentiment in New Zealand’s economy.
Meanwhile, China’s steadier growth outlook, underpinned by the suspension of “reciprocal” tariffs, is expected to bolster New Zealand’s trade prospects.
UBS analysts forecast only one more 25bp easing to a terminal rate of 3.00%, with the NZD/USD seen strengthening to 0.64 over the next 12 months.
Economists at ANZ say in a new assessment that the New Zealand dollar is poised for gradual appreciation through 2026 despite recent softness, supported by improving local fundamentals and a return to fair value.
“While global themes have dominated so far this year, local factors are likely to take the reins,” said David Croy, Senior Strategist at ANZ. "These include relative interest rates, the outlook for export prices, fiscal policy, labour markets and productivity."
"The gravitational pull to fair value and higher commodity prices are underpinning our forecasts for gradual NZD appreciation over 2026,” he adds.
However, analysts at Commerzbank warn the NZD will stay pressured, judging the domestic economy needs to make greater improvements to put the RBNZ at ease.
According to Commerzbank, although consumer confidence is recovering, it remains well below pre-pandemic levels. Structural issues such as low productivity growth and falling export demand—particularly from China—further limit the NZD’s upside.