Westpac's New Zealand Dollar Forecasts Show Bumpy Path vs. Pound, Euro but Gains vs. U.S. Dollar

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The New Zealand Dollar is predicted to rise into the middle party of 2025 against most major currencies, according to a new update from economists at Westpac.

The Kiwi looks set to benefit from an improved global growth backdrop and a U.S. Dollar that will will continue to trend lower. But analysts at Westpac say they are on alert for a bounce in New Zealand economic performance as restrictive interest rates continue to loosen in the coming months.

"The RBNZ has kicked off its easing cycle relatively early and seems intent on tempering policy restriction more quickly than had been expected. There has been a sharp easing in financial conditions as wholesale and retail interest rates have adjusted to levels not seen in some years," says Kelly Eckhold, Chief Economist NZ at Westpac.

Eckhold says the key to the outlook will be the extent to which the economy responds to these easier conditions. "There are some encouraging but not definitive signs. Hence, we are all on bounce-back watch."

The RBNZ is judged to be more comfortable with lowering interest rates much earlier and more quickly than previously signalled. "With headline CPI inflation forecast to remain well within the 1-3% target range from Q3 2024, the RBNZ feels much more freedom to respond to weaker output and employment indicators," explains Eckhold.

As a result, New Zealand's financial conditions have eased significantly: short-term swap rates are down around 100bps and mortgage rates have fallen by 50-100bps.

Westpac's baseline view is that by the end of this year, the economy will have begun to respond to the easing in conditions that have occurred. The bank's economists think the RBNZ will be comfortable with delivering two 25bp cuts in the remaining meetings in 2024 should things pick up a bit, but that the OCR path for next year is naturally a lot more speculative.

 The U.S. Dollar is expected by Westpac to edge lower over the coming months and through 2025 as the U.S. growth advantage is reduced as other countries see improved growth.

This creates a relatively straightforward profile of appreciation for the Kiwi Dollar against the U.S. Dollar, but recoveries in UK and Eurozone growth mean a more mixed performance for the currency against the Pound and the Euro.

"EUR and GBP to be supported by growth," says Elliot Clarke, Head of International Economics at Westpac.

The New Zealand to Pound exchange rate is forecasted by Westpac to be at 0.47 by the end of 2024, 0.48 by the end of the first quarter of 2025, 0.48 by the end of the second quarter, 0.47 by the end of the third and 0.48 by the end of 2025.

This gives a Pound to New Zealand Dollar forecast profile of 2.13, 2.08, 2.08, 2.13 and 2.08.

There is a similar bumpy path ahead against the Euro, the Kiwi Dollar is seen at 0.56, 0.57, 0.56, 0.55 and 0.56. This gives a Euro to New Zealand Dollar forecast profile of 1.79, 1.75, 1.79, 1.82 and 1.79.

The New Zealand vs. U.S. Dollar exchange rate is more linear, with the forecast points are 0.62, 0.63, 0.63, 0.63 and 0.64.