NZ Dollar Faces Dovish Repricing as Economy Slows

New Zealand's economy is expected to slow sharply in Q2, with domestic demand weighed down by higher fuel prices, uncertainty, and falling house prices. According to Brown Brothers Harriman (BBH), leading indicators suggest a recovery in Q3, but the Reserve Bank of New Zealand (RBNZ) projects a relatively low policy rate peak compared to market expectations.

The RBNZ's projection for Q2 real GDP is 0% q/q, down from 0.8% in Q1. This slowdown is attributed to lower real incomes due to higher prices and uncertainty. However, the bank notes that spare capacity remains in the economy, particularly in the labor market.

The swaps curve implies a policy rate of 4.25% in the next two years, which is significantly higher than the RBNZ's projection of around 3.25% in 2028. This gap leaves room for a dovish repricing, which could act as a drag on the New Zealand Dollar.