File image. RBNZ Governor Christian Hawkesby. Source: RBNZ, Pound Sterling Live.
The Reserve Bank of New Zealand (RBNZ) appears to have ended the cutting cycle.
Wednesday's 25 basis point cut could be the final cut in the cycle, meaning the New Zealand dollar's interest rate headwinds will fade.
The currency rallied after the RBNZ lowered the OCR to 2.25% and released new forecasts that indicated it projects the rate to be at 2.20% in the first half of 2025, i.e. effectively unchanged.
Forward guidance also turned more neutral and there's less of a bias to follow through with further cuts.
However, the market was positioned for further cuts going into today's decision, which means it has been caught slightly wrong-footed by the central bank's apparent comfort with current levels.
The necessary readjustment in market expectations is reflected in higher Kiwi bond yields (interest rates on government bonds) and a firmer currency.
The pound to New Zealand dollar exchange rate has dropped a per cent to trade at 2.3197, and there's a real chance that the high of the year is in (this being yesterday's peak of 2.3550).
Elsewhere, the Euro-New Zealand dollar is down a little more than a per cent at 2.0380, and the New Zealand dollar-U.S. dollar conversion is up 1.10% at 0.5681.
"NZD/USD has staged a sharp bounce after forming an interim low near 0.5580 last week. It has broken out from a pattern resembling a falling wedge highlighting resurgence of upward momentum," says Tanmay Purohit, a technical analyst at Société Générale.
The RBNZ said future rate moves will hinge on the evolution of data, whereas previously it referenced "further reductions" in the cash rate.
"This shift alone framed the meeting as the first meaningful step away from a strong easing bias," says Bader Al Sarraf, Research Analyst at Standard Chartered.
Above: NZD is outperforming all G10 peers on Wednesday, Nov. 26.
The slope of the forward-looking interest rate profile is interesting, as the end of the cutting cycle means we start now considering when the first hike of the ensuing upcycle falls.
"The RBNZ's forecasts imply a first OCR hike around the middle of 2027, with the OCR to gradually move up towards 3% (the RBNZ's estimated neutral rate) by the end of 2028," says Kelly Eckhold, Chief Economist at Westpac.
The New Zealand dollar is one of the poorer-performing G10 currencies of 2025 owing to the RBNZ's aggressive easing cycle, which has meant New Zealand's bond yields have fallen relatively quickly when compared to elsewhere.
However, that all now changes as the outlook prices in interest rate rises, which should confer some support to the currency.
Of course, the about-turn in fortunes lies with the economy, which has started to show some genuine signs of improvement, largely because of the steady pace of interest rate cuts that have benefited businesses and households.
The central bank won't want to risk raising inflation by cutting interest rates any further, and feels that it would now be wise to allow for an extended period of steady interest rates to allow the economic recovery to grow in confidence.
Westpac expects no further cuts in the OCR; their baseline forecast is that the OCR will begin a gradual move higher from late next year.
However, Eckhold cautions against betting on a surge in NZD:
"The exchange rate has moved a touch higher as markets likely expected a more dovish outlook than seen today. More generally, we suspect that the New Zealand dollar
will remain weak against most currencies until such time as markets turn away from the risks of a lower OCR and consider the timing of the tightening cycle."
If bets rise for a 2026 rate hike, the Kiwi could be set for a spell of outperformance next year.