After a hectic month marked by a whirlwind of trade escalations and de-escalations, the Government’s budget release, and last week’s RBNZ Monetary Policy Statement, May has officially come to a close. The mayhem, however, is far from over. Tariff volatility continues to dominate financial markets. Whether it's the ongoing legal battle between the Trump administration and the courts over the legality of the "Liberation Day" tariffs, or the renewed tensions between the US and China – with each side accusing the other of violating their trade truce – or the proverbial (not literal!) shots aimed at the European Union, the economic landscape remains incredibly fragile.

There’s a lot of noise right now. And it’s hard for everyone, including policymakers, to make sense of it all. The RBNZ’s latest statement alone mentioned the word uncertain, or some or a form of it, 164 times across their 60 or so page statement. That’s about 3 mentions a page…

Nevertheless, the RBNZ delivered on expectations and delivered another 25bps cut. The cash rate sits at 3.25%. And there’s more cuts coming. That’s the key takeaway from the May MPS. Although the path from here is highly uncertain. (See our full review).

The OCR track was lowered from a flat lined bottom of 3.10% to a 2.85% trough in March 2026. So now another 25bps cut to 3% is fully baked into the cake. And from there, there’s a 60% chance of another 25bps cut to 2.75%. Once again, we would love to have seen a bit more. We’re still of the view that a 2.5% cash rate is what the Kiwi economy needs. And an OCR track bottoming anywhere below 2.75% would have signalled what we had hoped to see.

But with each MPS, the terminal OCR has moved closer to our 2.5% view. Give them time, and they just might get there. But for now, such heightened uncertainty is making it harder for all policymakers to navigate. So, it’s not surprising to see the committee err on the side of caution. The fact the RBNZ “voted” 5-1, with one member opting for a pause to assess, throws some doubt on the timing of the next move, but not the direction. They are not on a “pre-set course”, and always data dependent. We think there’s enough for them to cut again in July, but they may wait until August to cut again. It depends… on what? Everything.

All in all, we think there was a bit in the May MPS for everyone, dove or hawk. The RBNZ’s forecasts were markedly revised lower. The expected Kiwi economic recovery is forecast to be slower than projected in the February MPS with the RBNZ now forecasting 0.7% growth this year, down from 1%. And greater spare capacity than previously modelled also sees unemployment stay higher for longer. You can’t ignore that. And that’s the dovish part.

The hawkish part lies in the dissenting 5-1 vote and the accompanying hawkish tone in post MPS media conferences. Comments from Hawkesby including the statement that the Committee will have “no clear bias” heading into the July meeting, injected a dose of uncertainty. And together, these seeds of doubt gave markets something to run with. Rates, particularly in the short end saw a sizeable jolt higher (see our COTW for move on the move in markets). But we think markets, as they so often do, have gotten a bit carried away. Time will tell.

Financial Markets

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

In rates, uncertainty was the word du jour

“Last week in Kiwi rates was centred on the MPS, with offshore moves fading into the background. In hindsight the name should have been a giveaway, the interim governor (Christian Hawkesby) delivered a hawkish press conference. This despite delivering a cut and a lower OCR track. The market was flat footed by the pivot into a neutral bias. This saw rates sell off, with 10bps of cuts taken out and the terminal back around 3%. They key 2yr now back up close to 3.20%. Though the long end was unchanged seeing the curve flatten.

Looking ahead, July and August now much more uncertain. Uncertain being the watchword of the MPS (appearing over 150 times in the statement). With GDP the only major domestic data release between meetings, a hold would seem likely in July. The RBNZ has given itself maximum optionality and seems in no rush to cut below neutral. On the other hand, they have continuously revised down their track.” Matthew Crowder, Balance Sheet Manager – Treasury.

In currencies, we are back to looking at tariff uncertainty

“We had more of a local focus for the Kiwi dollar last week, with the RBNZ’s MPS. They delivered a 25bp cut, but market participants are more uncertain now on further cuts from here, and if there are cuts, when. The 2.85% terminal rate in the OCR track was essentially where the market was already priced, and therefore the reaction in the Kiwi dollar was fairly muted, touching a brief high of 0.5980 post the announcement before falling back to the more familiar 0.5950. From that point the Kiwi was looking likely to be more range bound, or driven by offshore factors. This came to fruition over the weekend where tariff tough talks escalated between China and the US. The US dollar has again been under pressure and the Kiwi hit a high on Monday night of 0.6044. With this focus on uncertainty, it is looking likely that the US dollar may be under further pressure in the coming weeks. We think the Kiwi dollar is pretty well supported in the 0.5850-0.5950 ranges, and has some further upside potential should we sustain a break above 0.6030.

On the NZDAUD front, we may be looking to break ahead out of recent ranges, with the 50% Fibonacci level (short term) now in play. The level to crack is the 0.9288 point. We earlier had a run higher to 0.9372 at the height of tariff uncertainty in April, when markets were very amok, during the initial tariff news shocks. But post that event were more comfortably in the 0.9150-0.9250 range. Following the slightly diverging RBA (dovish) and RBNZ (cautious) outlooks, as well as the impact of the aluminium and steel tariffs now at 50%, the 0.9280 level is being tested again (high over the weekend of 0.9302), and a sustained break over this level opens the cross to trade higher to 0.9350.” Mieneke Perniskie, Trader - Financial Markets.

Weekly Calendar

• Across the Tasman, Q1 GDP is due out and expected to show growth slow at the beginning of the year. Market consensus is for a moderate 0.4% expansion in economic activity, slower than the 0.6% gain at the end of last year. High-frequency indicators signal a slowdown in domestic demand as household spending disappointed. Some tariff front-loading however has supported external demand which should provide some offset to weak local demand. The RBA minutes for the May meeting will also be published this week. The minutes will provide more colour around the notably dovish tone of the RBA that accompanied their second rate cut this cycle.
• The US non-farm payroll print for May is the main market risk event this week. The pace of jobs growth is expected to slow, with 130k jobs expected to have been added in May, fewer than April's 177k. The unemployment rate is picked to remain unchanged at 4.2%, signalling that the US labour market is softening but remains in a relatively good place with balanced labour demand and supply.
• The ECB is widely expected to lower its key policy rates by 25bps this week, and will likely maintain a dovish bias. The disinflationary force of US tariffs as well as the latest update on wage growth suggest that inflation is no longer an issue in the euro area. The May flash-CPI print, due before the ECB rate decision, should provide confirmation. Headline inflation is expected to decelerate to 2% from 2.2% in April, as underlying price pressures ease. Looking ahead, euro-area inflation risks falling below the ECB's target as moderating wage pressures weigh on services inflation. Low growth and contained inflation should see the ECB deliver further rate cuts this year.

See our Weekly Calendar for more.