New Zealand Dollar: GBP/NZD Jumps Following RBNZ Decision

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The pound to New Zealand dollar exchange rate rises to 2.2623 (+0.88%).

The New Zealand dollar fell across the board after the Reserve Bank of New Zealand (RBNZ) struck a dovish tone.

The decision and currency market reaction was in line with our own predictions, but will have caught some elements of the market by surprise as there was an expectation that a host of forecasts would be lifted.

One crucial forecast for the market is the RBNZ's own expectation for its policy rate, i.e. where it predicts the OCR will move in the coming months. Today, it left that prediction largely unchanged, meaning it does not agree with a market that sees interest rates rising in the second half of the year.

"The market was anticipating a more hawkish adjustment higher in the policy forecast trajectory, but the RBNZ remained cautious on its eventual rate hike forecast, only raising odds slightly of a single rate hike this calendar year to about 50% probability of a single hike," says Saxo Bank.

The updated projections push back against a building market narrative that the RBNZ will follow the Reserve Bank of Australia into a hiking cycle, denying the NZD a source of domestic support.

The sharp reaction in the NZ dollar is in keeping with a dovish surprise and the movement could put a floor under some key NZD exchange rates; for instance, GBP/NZD has been under pressure this year and today's decision and market reaction open the door to some consolidation.

Above: The market steadily raised NZ's interest rate profile over recent weeks. That had boosted NZD.

To be sure, we aren't suggesting a turn in trend, rather it gives the market an opportunity to retrace some of the recent losses and consolidate while it makes its mind up about what comes next.

In our GBP/NZD Week Ahead Forecast we warned that the RBNZ might wish to stress a more balanced view on the outlook, saying that both cuts and hikes were still in the frame, depending on the data.

We warned this would counter the decidedly 'hawkish' repricing in NZ interest rate expectations, where it was clear the market was fully on board with the next move being a hike.

Above: GBP/NZD reacts to the RBNZ decision.

The RBNZ expects inflation to move back inside the target band in the coming quarter and fall back to 2.0% by mid-2027, but risks are viewed as "balanced".

"The generally dovish tone significantly moves the balance of risk away from an earlier start to the tightening cycle," says Kelly Eckhold, Chief Economist for NZ at Westpac.

Eckhold says interest rates could rise sooner than December "if either activity or inflation readings exceed the RBNZ’s expectations, or later if the converse occurs."

That admission that there might not even be a rate hike this year reflects the RBNZ's balanced approach to policy, which will serve as a sober moment for the more 'hawkish' elements of the market.

For the NZD, some retracement of the 2026 advance looks possible from here.