We’ve heard from all the major central banks. Now it’s the RBNZ’s turn to take the stage. And Wednesday’s decision, with updated forecasts, sets the scene for the next three months. There’s no doubt that the Kiwi economy needs support. There’s no doubt the RBNZ should be aiming to stimulate, not restrict, the economy. It’s just an argument around how much support is needed.

Adrian Orr has left the RBNZ and Christian Hawkesby is in charge for six months. In order to get the gig full time, a lot will hinge on his decisions from now. It’s a job interview of sorts, in front of a Government (esp. Minister for Finance) laser focussed on costs and ‘go for growth’ strategies. This week’s decision is a chance to differentiate from the Orr era. The economic developments since the RBNZ’s last MPS have deteriorated, especially offshore. The justification of a more “go for growth” focussed RBNZ has strengthened. Hawkesby (hopefully Dovesby) could easily deliver a 50bp move and signal another 50bps to 2.5% to come. That would set policy about right for a recovery. And it's not mucking around with 25bps moves, delaying the inevitable.

A more decisive RBNZ would be viewed positively across the road (Terrace), given the difficulty the Government had in balancing Budget 2025. 2026 will be just as hard. The operating surplus (based on the preferred OBEGALx measure), is still achieved, on paper, in 2029 – at the very end of the projection period – but to an amount that needs a magnifying glass to see on a chart ($200mil or 0.0% of GDP). The weaker reality means more debt. The debt management office will have to issue an additional $4bn over the next four years to 2029. Net debt rises to a peak of 46% and remains above previous projections. See our full review of Budget 2025.

There are three ways the May MPS could possibly play out:

The first scenario, is lifeless. The RBNZ delivers a 25bp cut and leaves the OCR track at 3.1% or slightly below at 3.0%. This would not go down well. Wholesale market traders would drop bonds, pushing interest rates higher. The pivotal 2-year swap (interest) rate would rise from around 3.15% now to 3.25% (about 10bps). Mortgage rates would barely move… if anything, it might see a reduction in discounting.

The second scenario, is what we think they will do. A 25bp cut accompanied by a lower OCR track to 2.8% (or close to). Currently, most economists sit between a low of 2.5% (Kiwibank) and a high of 3%. This scenario will push most economist forecasts below 3% to a 2.5-2.75% range. The wholesale rate markets imply a terminal rate of 2.85-2.9%. We should see a (very) slight reduction in rates, supporting current mortgage rates. The variable and 6 month rates would move lower, but the 1 year and beyond wouldn’t move much at all. That’s not what we need either.

The third scenario, is ‘go for growth’, generate green shoots. A Doveish Hawkesby should put a 50bp move on the table, and an OCR track to 2.5%. The shock without Orr would see wholesale rates poleaxed. The 2-year swap rate would immediately test 3% (down from 3.15%), and ultimately fall towards 2.75%. All mortgage rates are likely to be lowered, as needed. A slightly watered-down version could be a 25bp cut and a much more dovish track to 2.5%

The RBNZ’s current trajectory is unlikely, in our view. Get to neutral, and get the economy moving. Ultimately, it’s better to act swiftly and decisively to get lower rates feeding through faster. More meaningful cuts are required here and now. Especially with the ongoing global uncertainty. The US and China may have made some “temporary” progress a fortnight ago. But now tensions between the US and Europe are intensifying. At the end of last week, President Donald Trump threatened to impose a blanket 50% tariff on the EU with trade discussions apparently “going nowhere”. Once again, market traders took risk off the table. Equities ended the week lower, and the US dollar fell to the lowest level since December 2023.

Financial Markets

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

In rates, there’s a theme of lower yields in the morning, and higher yields in the afternoon

“Kiwi yields lower in the front end and static from 5-10 years last week. In general, we are seeing a theme of lower yields in the morning courtesy of offshore moves, and higher in the afternoon on domestic. However, last week the lower front end more a reactive function to a slightly more dovish RBA and NZ Treasury forecast for a 2.50% (in 2027) OCR. Offsetting that the Moody’s downgrade of the US continues to percolate through markets, steepening global yield curves. That theme spreading to other markets as a 20-year Japanese Government Debt auction saw its lowest bid cover since 2012. In summary, NZ yields getting pushed and pulled but largely locked in a tight range.

Looking forward, the RBNZ on Wednesday hold court a -25bp cut universally expected and priced by the market. The market is laser focussed on where the OCR track troughs. Feb forecast had that at 3.10%, it should be lower at least the 2.80-2.90% level. Market pricing is exactly in the middle of that range for the OCR to trough at 2.85% in November 2025. On its own it shouldn’t generate a whole lot of movement. Market reaction will be about tone and how the RBNZ is assessing the impact of the global situation offset by the recent rise in domestic inflation measures (actual and surveyed). It’s a difficult balancing act that warrants caution.” Ross Weston, Head of Balance Sheet – Treasury

In currencies, the Kiwi dollar will have more of a local focus this week

“The Kiwi dollar has certainly been somewhat at the whim of global factors of late, but of course there are still the fundamentals closer to home. And this week we hear from the RBNZ, with their MPS. The Kiwi has found some solid support in the 0.5850/0.5900 levels in the last week or so. But Trump threw another curve ball last week, with his EU tariff plan of 50%, and the US dollar has again hit the skids. The Kiwi got to a high of 0.5990 on Friday. For the RBNZ this week, there is currently a 25bp cut priced in, and a little more. Economist expectations for the terminal OCR level are now at a median 2.75%, as indicated in a Reuters poll late last week. The market is priced at 2.85%. So there is a possibility that the RBNZ disappoint these expectations, if their OCR track is not updated in line with this. If we get a hawkish cut this week, where the OCR track remains at 3.10% or above the Kiwi will head higher to the 0.6000+ level, quick smart. Potentially higher, depending on what is happening with the Greenback at the time, and given the sell off late last week. If we get the ‘moderate’ or middle of the road cut, cutting 25bp and lowering the OCR track to 2.8% or thereabouts…we are likely to get a pretty muted reaction, as this is effectively already priced in. If we get the dovish cut, which is what Kiwi Economics are looking for, and an OCR track closer to 2.50%, then we will likely see a swift move lower in short dated rates, and a lower Kiwi dollar. We would then easily break through the 0.5940 level, opening up into the 0.5845 (38.2% Fibonacci) and perhaps beyond the current week, then down to the 0.5726 (23.6% Fibo) level. And in the other major currency pair, the NZDAUD, last week we had a bit of a surprise from the RBA: they turned dovish! They delivered their 25bp cut which was anticipated, but finally admitted that the risks around inflation are looking a lot more balanced. They also debated a 50bp cut and the NZDAUD got to a high of 0.9232 following the RBA on Tuesday. Our very lacklustre ‘growth’ Budget 25 saw this unwind somewhat, back down to the 0.9200 level. Overall, the week saw a range of 0.9170-0.9240. If we do get the much needed ‘Dovish RBNZ’, we see this NZDAUD cross back below 0.9100, if not pushing back to 0.9050. We could argue, that with now even the RBA sounding a bit concerned and on the ‘Dove’ side, the RBNZ need to deliver a dovish cut this week too. Inflation is essentially under control, and we need further growth. ” Mieneke Perniskie, Trader - Financial Markets.

Weekly Calendar

• Domestically, the RBNZ's May Monetary Policy Statement (out Wednesday, 2pm) is the main event. The OCR is widely expected to be cut by 25bps to 3.25%, and the global trade war will likely see a downgrade to the RBNZ's economic growth forecasts. The OCR track is a key focus, which is expected to show further easing in 2025. See above for our full preview.
• Across the Tasman, April CPI is expected to show inflation easing further and nearing the bottom of the RBNZ's 2-3% target band. Annual headline inflation likely slowed from 2.4% in March to 2.2%, Lower fuel prices will be a key downward driver, while a lift in food prices will provide a boost. More important for the RBA is the gradual easing in trimmed-mean inflation, which strips out the more volatile items including food, fuel and electricity.
• The FOMC held rates steady at its May meeting, but warned of the heightened risks around inflation and unemployment due to the changes to US tariff policies. The minutes will be scoured for further insight into the committee's discussion around the revised forecasts. Several Fed officials are scheduled to speak throughout the week. The common message will likely be one of prioritising price stability over short-term growth concerns.
• Tokyo inflation likely remained elevated at 3.4%yoy in May, reinforcing the case for the Bank of Japan to raise rates further. Core inflation (excluding fresh food) is also expected to have accelerated to 3.5%yoy from 3.4%yoy. Uncertainty over the economic outlook is a key consideration for the BoJ, but a hot inflation print reiterates the need to dial back stimulus.

See our Weekly Calendar for more.