Kiwi Price Reflects Rate Hike, Second Increase Unlikely

The New Zealand dollar has already reflected the Reserve Bank of New Zealand's (RBNZ) interest rate hike in July, which was its first increase since 2023. The central bank raised the Official Cash Rate by a quarter point to 2.50%, citing that it was below neutral at 2.25% and that standing still would let financial conditions loosen further.

The Kiwi has climbed around 5.7% from its early-July low near 0.5600 and is now trading close to its window high of just above 0.6000. This suggests the currency has already tightened financial conditions, which was one of the reasons for the rate hike.

The domestic case for a second increase is thinning, with headline inflation expected to have peaked at 3.9% in the June quarter and fall to 3.3% in the September quarter. Surveys indicate lower inflation expectations in the September quarter, back to levels before the oil spike.

On the activity side, house prices ran 0.4% lower on the year in May, residential investment contracted despite strong consent growth, and the central bank's own nowcast for September-quarter growth sits at 0.6%. Major New Zealand banks still expect two more quarter-point moves to bring the rate near 3.00% by year-end.