In their final meeting for 2025, the Reserve Bank delivered a 25bps cut as widely expected. The cash rate ends the year at 2.25%. And maybe ends the easing cycle there too.

From the tone, the vote, and the refreshed OCR track, everything from last week’s decision was reflective of a central bank potentially at the end of its cutting cycle

For starters, last week’s decision came down to a 5-1 split vote with one of the MPC members voting to keep the cash rate on hold at 2.50%.

Beyond the vote, the RBNZ’s updated OCR track was also telling. The track was lowered to an endpoint of 2.20%. It implies the RBNZ maintains some optionality to deliver further stimulus into 2026 should it be required. However, both within the Monetary Policy Statement and in additional comments from the MPC members, it is clear that the RBNZ sees a reduced need for further cuts. Now-former Governor, Christian Hawkesby, even explicitly commented that there is a high hurdle for any further easing from here.

We expect (and hope) the RBNZ has now done enough to see a material lift in activity next year. And we may finally shift firmly into recovery mode. But similar to the RBNZ, we maintain some optionality. We still see the risks as titled towards more cuts (not hikes) near term.

There was a trifecta of good news data following the RBNZ’s decision last week. ANZ business confidence hit an 11-year high in November, ANZ consumer confidence also picked up 6pts. But the real kicker was the marked pick up in retail sales over the September quarter. Sales volumes increased by 1.9% - the largest increase since late 2021 (see our COTW for more). It all adds to the case of 2.25% marking the bottom of the RBNZ’s easing cycle. We think it is. And that’s good news. But we’ll still be keeping a close eye on how the economy develops over the summer. Will these greenshoots blossom over summer but then wither away in winter? That’s what happened this year. And we don’t want to see a repeat. What’s different this time is that policy conditions have moved into stimulatory settings. A cash rate at 2.25% is more supportive of a solid recovery in 2026. Compared to last year, interest rates are meaningfully lower. And the RBNZ has signalled they’ll stay low for some time.

With the RBNZ close to the end of the easing cycle, and the strong data that followed, there has been a material shift in mood across financial markets. Kiwi yields skyrocketed and the Kiwi dollar popped higher. In the rates space, the pivotal 2-year swap was already riding a wave higher following a strong inflation print across the Tasman. The RBNZ’s surprisingly hawkish tone provided a further boost. But it was the strong data in the days following the MPS that turned that wave into a tsunami. Traders yelled cowabunga, leaving the 2-year swap up 28bps today compared to levels prior to the RBNZ. That is a massive move. The Kiwi dollar also peeled away from its recent lows and rose back above 57c. The Kiwi Aussie cross also climbed, but would have been higher still if not for the hot Aussie inflation print. The RBA meet next week, and are expected to firm up its language. Strong local demand and hot services inflation may shift thoughts from rate cuts to rate hikes, limiting further appreciation in the Kiwi Aussie cross.

Financial Markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In rates, the right conditions at the right time and place sees Kiwi yields steeply higher

“Turning points in New Zealand rates can be sharp and hard to predict. This one had all the right conditions in place, and the RBNZ simply brought them together at the right moment. Markets largely anticipated a statement that validated current pricing, but the RBNZ took a different stance, signalling only a slim chance of further easing and even a possibility of a hike by late 2026. This was reinforced by one member calling for no change and hawkish commentary post-decision, emphasizing that the bar for another cut is high.

The +10bp move higher in yields on the day expected by the RBNZ. However, by weeks’ end the +28bp move (in 2yrs) on the larger side. Perhaps the RBNZ relying on mortgage rates and competitive pricing to absorb the increase via lower bank margins. The upside moves riding a strong tailwind from bumper Aussie CPI out the same day, coupled with very strong NZ Business/Consumer Confidence and Retail spending data on the ensuing days. That enough on its own to support the lift in yields. Then there’s market positioning and the building expectation of mortgage fixing, both of which fanned the flames. By Friday, the market looked to be equalising at these lofty levels, which should limit the large daily selloffs, but maybe not the direction.

Normally the curve would flatten. Expectation of higher short-term rates and medium term lower again. This has occurred in the 2-year vs 10 year flattening by around -11bp, aided by US 10year dropping below 4.00% again. However, the 2y vs 5 year has only flattened -3bp. More due to poor positioning, 5-year trades looking for lower rates exiting, this flow needs to clear before that part of the curve flattens.

The rates market has shifted meaningfully. Before the meeting, the curve had around -15bp of cuts priced in; that’s now down to -4bp, with a full +25bp hike priced into 2026, the most notable change. This move is supported by stronger retail sales and confidence data and could be reinforced by a rebound in Q3 GDP (and a revised Q2 figure) due on December 18.

How far can this run? The -50bp cut in October was clearly the circuit breaker the economy needed, so markets may be anticipating a quick reversal of last week’s -25bp cut. Add in mortgage fixing, an upcoming NZ election, and a significant Fonterra payout, and the upside narrative is easy to construct.” Ross Weston, Head of Balance Sheet Management – Treasury.

In currencies, a hawkish cut from the RBNZ sees the Kiwi dollar higher

“The RBNZ delivered what could well be their final -25bp cut to the OCR last week, and the Kiwi dollar traded higher. The updated OCR track had a terminal rate of 2.20%, which implies only a small 20% probability of another cut in early 2026, if the data surprises to the downside. The hurdle for an additional cut is high. The market moved swiftly to reprice their expectations, and the Kiwi dollar quickly traded to a high of 0.5697 on Wednesday, from 0.5620 prior. Following the MPS, on Thursday the Q3 Retail sales print was released, as well as the ANZ Business confidence survey, where both surprised to the upside. The positive data prints gave the Kiwi the final push higher into the 0.5700’s, reaching a high of 0.5732 on Thursday. For the Kiwi to track higher from here, we will need to sustain momentum above 0.5730, with 0.5750 the next major resistance point (being the 50% fibo retracement level) followed by 0.5787 (38.2% fibo). In the short term, there should be firm support at 0.5685.

The NZDAUD reaction was similar, despite the hot Aussie CPI print released on Wednesday. The NZDAUD cross traded from 0.8688 to 0.8766. The follow up positive data prints to close the week reinforced the move higher, and the cross touched a high of 0.8772 before closing the week at 0.8760. NZDAUD momentum from here may be muted, given the recent tests of multi-year lows.

On the US dollar front, a combination of mixed data, but some positive rhetoric from Federal Reserve officials on the possibility of another rate cut from the Fed in December, saw the US Dollar index (DXY) track lower to 99.45 over the week, after previously sitting close to 100. The slightly softer US Dollar provided some additional support for the antipodean currencies. The next major direction point is the Fed’s FOMC next week, and then the NZ Q3 GDP print the week following.” Mieneke Perniskie – Senior Dealer, Financial Markets.

Weekly Calendar

• Here at home, more GDP partial data is due out this week. With the uptick in residential dwelling consents, building work put in place should see an improvement following an almost 2% decline over the June quarter. The downturn in construction, specifically in the residential space, appears to have found a base. 2026 should see a firmer recovery in activity.
• Newly appointed RBNZ Governor Dr Anna Breman, will make her first appearance before the Finance and Expenditure Committee for the 2025 Annual Review hearing on Tuesday this week.
• Across the Tasman, September quarter GDP will be released, and expected to be a strong print. Economic output likely expanded 0.7% over the quarter, and 2.3% over the year with broad-based gains. Business investment, residential construction and consumer spending are all picked to rise over the quarter.

See our Weekly Calendar for more