The New Zealand dollar hits a four-month low, and the Australian dollar drops to a two-month trough on anticipation of an RBA rate cut in September.
Westpac forecasts the RBNZ will remain dovish until the economy uses up its spare capacity.
Kiwi and Aussie fall as RBNZ prioritizes growth over inflation
The Reserve Bank of New Zealand (RBNZ) has cut interest rates to a three-year low, with the official cash rate (OCR) averaging 2.71% in the fourth quarter of 2025 and expected to decline further to 2.56% by the second quarter of 2026. Governor Hawkesby explained that the 50 basis point rate cut was aimed at countering excessive caution among businesses and consumers, providing a substantial boost to confidence and economic activity. The RBNZ highlighted spare capacity in the economy and easing domestic inflation pressures, projecting headline inflation to return to the 2% target midpoint by mid-2026. The central bank noted that higher tariffs and global trade barriers act as a negative demand shock, weighing on worldwide economic activity. Despite a recent lull, RBNZ Chief Economist Paul Conway described the economic weakness in the second quarter as temporary and indicated that the bank does not need to be excessively stimulatory. Commodity price gains and low interest rates are seen as supportive factors for economic recovery. The RBNZ's dovish stance has led to a weakening of the New Zealand dollar to a four-month low and the Australian dollar to a two-month low, with market expectations of an upcoming rate cut by the Reserve Bank of Australia in September. Westpac forecasts that the RBNZ will maintain its accommodative policy until the economy fully utilizes its spare capacity.
