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The RBNZ's change in tone on rates could be a trend-turner for the NZ Dollar.
The Reserve Bank of New Zealand (RBNZ) is taking no chances with this energy shock: it's now considering at least three interest rate hikes to ensure it beats inflation.
That's the takeaway from the central bank's May meeting that saw it keep rates on hold, but by a razor-tight vote of 4-3, with Governor Anna Breman casting the deciding vote to keep rates steady at 2.25%.
The New Zealand dollar jumped across the board in response to the decision and guidance, which tells us the market is convinced the central bank is ready to raise rates to ensure inflation doesn't run away from the 2-3% target band it targets.
"One risk is leaving the OCR too low for too long, and having inflation take off," says Wesley Tanuvasa, Economist at ASB.
The policy-setting board said in the statement that it intends to act preemptively to ensure that "higher costs do not lead to elevated inflation over the medium term, while avoiding unnecessary economic volatility."
What was also notable from a financial markets perspective was an upward revision to the RBNZ's own forecast path for the policy rate it sets: in the February projections, the RBNZ expected to gradually take the policy rate to 3.00% by the end of 2028, but it now sees the policy rate at 3.00% in early 2027 and a terminal rate now at 3.25%.
This represents a significant shift in stance by the RBNZ, from a central bank that was erring to cutting rates early on in 2026 to one that is about to pull the trigger on a rate hike.
Image courtesy of Standard Chartered.
That's a shift that aligns more closely to that of the Reserve Bank of Australia (RBA), which has raised rates on three occasions in 2026, decisions that make the AUD the top-performing major currency of 2026.
Sure, Australia's economy is running hotter than that of New Zealand, but the impact on the currency markets of the interest rate policy stance is potent: the RBNZ could be about to provide consistent tailwinds to the Kiwi dollar, just as the RBA did for the Aussie.
"The standout performer is the New Zealand dollar, where the previously dovish Reserve Bank of New Zealand came very close to hiking rates last night. It was only the casting vote of the governor, Anna Breman, which decided the 3-3 split in favour of a hold at 2.25%. The event serves as a reminder that erstwhile doves can quickly switch," says Chris Turner, head FX analyst at ING Bank.
ASB, the Auckland-based lender, says it expects the RBNZ to lift the base rate in July and then again at each meeting this year to a peak at 3.25%.
"Lifting the OCR soon would start closing the gap up to where there is less chance of making a policy mistake over the longer term," says Tanuvasa.
The pound-to-New Zealand dollar has been rising in confident fashion since mid-May but is lower 0.60% in the wake of the RBNZ at 2.29. Pound Sterling Live's Week Ahead Forecast warned the market was too complacent heading into the event and that the GBP/NZD risked falling as a result of the actual outcome.
Elsewhere, euro-to-New Zealand dollar is 0.63% lower at 1.9807 and the New Zealand Dollar-U.S. dollar rate is 0.73% higher at 0.5879.
"A clearer hiking cycle, firmer domestic activity data, sticky inflation expectations, or further upside in New Zealand rates would support the currency," says Nicholas Chia, FX Strategist at Standard Chartered.
"A clearer hiking cycle, firmer domestic activity data, sticky inflation expectations, or further upside in New Zealand rates would support the currency," he adds.