Above: RBNZ Governor Adrian Orr. File Image © Pound Sterling, Still Courtesy of RBNZ

The New Zealand dollar fell heavily against all major currencies overnight on Wednesday, leading to a spike in GBP/NZD, after the Reserve Bank of New Zealand cut its interest rate and signaled that further cuts are likely up ahead.

GBP/NZD spiked back above 2.14 as NZD/USD fell back to the 0.60 level after the Reserve Bank of New Zealand surprised the market by cutting its cash rate 25 basis points to 5.25% on Wednesday.

Consensus had been for rates to remain unchanged and overnight index swap rates were only partially pricing in a cut, but comments from Governor Adrian Orr also likely weighed on the Kiwi.

“We think the RBNZ only seriously considered the option of cutting the OCR by 25bps at this point,” Westpac economists said in a note to clients following the decision.

“Today’s RBNZ update leaves us comfortable with our forecast of two further 25bp cuts in October and November. We will review our forecasts beyond then in the coming days,” they added.

Above: GBP/NZD shown at 15-minute intervals alongside NZD/USD.

Governor Orr further surprised the market when telling a press conference that the Monetary Policy Committee considered the case for cutting rates by a larger 50 basis points but settled for a smaller cut.

One factor potentially tempering the Kiwi’s losses may have been the RBNZ’s new forecasts, which were adjusted to suggest that as much as 100 basis points of additional cuts are likely by next August.

This additional easing is less than the 200 basis points of extra cuts that were recently priced into the market for the coming year on Tuesday, which many analysts and economists had described as excessive.

“The RBNZ also cut their GDP forecasts and expect a technical recession over H2 2024. They have also noted downside risks to their forecast,” Commonwealth Bank of Australia strategists said on Wednesday.

“Our colleagues at ASB expect the RBNZ to steadily lower interest rates by 25bps at each meeting until the official cash rate reaches 3.25% in late 2025. The next important event for NZD/USD is today’s US CPI for July. A weak core CPI can weigh on USD and help NZD/USD reverse some of the post RBNZ fall,” they added.

Above: GBP/NZD shown at daily intervals alongside NZD/USD.