Rabobank's Senior FX Strategist Jane Foley notes that the Reserve Bank of New Zealand's (RBNZ) unexpected decision to keep rates unchanged surprised markets positioned for a hike. The central bank highlighted subdued domestic demand despite an anticipated rise in inflation to 4.4% in Q4, largely from fuel. New Zealand’s economy has only recently exited recession and remains unbalanced, with earlier 2026 strength offset by Iran war headwinds.

New Zealand Dollar reacts to RBNZ pause

"Last week’s decision by the RBNZ to leave rates unchanged blindsided a market that was priced for a hike. The action has led to some soul searching ahead of this week’s RBA decision."

"The RBNZ commented at its policy meeting, that while annual inflation is expected to increase to 4.4% in the December quarter (largely on the back of fuel), that domestic demand remains subdued."

"The performance of the New Zealand economy has been very different from that of Australia in recent years, with the former only emerging from recession in late 2024 to an unbalanced performance last year."

"Despite some strong green shoots for New Zealand in Q1 2026, this was ahead of the headwinds caused by the Iran war."

"That said, the shock of last week’s RBNZ policy decision has underpinned some concerns over the signals that RBA Governor Bullock may provide this week."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

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