The Reserve Bank of New Zealand is widely expected to deliver a hawkish hold during its monetary policy meeting on May 27.CPI inflation increased to 3.1% YoY in 1Q26, slightly above the official 1-3% target range. However, the unemployment rate remained high at 5.3% in 1Q26, above 5% for the sixth consecutive quarter. Real GDP growth also disappointed, slowing to 0.2% QoQ sa in 4Q25, below the expected decline to 0.5% from 0.9% in 3Q25. However, the RBNZ is likely to prioritise above-target inflation over weak GDP growth and high unemployment. The New Zealand government officially removed the dual mandate in late 2023, returning the RBNZ to a single mandate focused strictly on price stability, i.e., to return inflation to the target band with an explicit focus on the 2% mid-point.
Despite the consensus for the Official Cash Rate to stay unchanged at 2.25%, the OIS market is pricing a 51.5% chance of a 25-bps hike at the July 8 meeting. RBNZ Governor Anna Breman has indicated her readiness to act decisively with rate hikes if medium-term inflation pressures become deeply embedded due to global energy shocks and supply chain disruptions arising from Middle East conflicts. The urgency for a policy pivot is strongly supported by the RBNZ’s latest Survey of Expectations, which revealed 1-year inflation expectations spiking from 2.59% to 3.41%. More importantly, the 2-year expectations also edged higher from 2.37% to 2.53%. This 2-year metric is crucial because it aligns directly with the timeframe over which the RBNZ sees monetary policy changes filtering down into consumer retail prices. Respondents also expected the OCR to increase to 3.01% by March 2027, despite expectations of lower 1Q27 GDP growth of 1.58% vs. the previous 2.03% projection.
We cannot rule out the RBNZ surprising with an “early” hike tomorrow. New Zealand banks have already started tightening financial conditions, factoring in a higher-for-longer rate environment. The May 2026 RBNZ Financial Stability Report also affirmed that the financial system remains resilient to heightened geopolitical vulnerabilities, thanks to robust capital and funding buffers. The introduction of the new deposit insurance scheme led to a 30% increase in the deposits of finance companies. Health insurers have also substantially raised premiums to offset years of high-cost claims, improving their solvency margins.
Hence, NZD/USD has the potential to return to the upper half of this year’s trading range of 0.57-0.61, especially if the USD sheds its haven status amid any US-Iran deal to reopen the Strait of Hormuz. With the Reserve Bank of Australia signalling a pause after three hikes this year, AUD/USD’s rally over the past year appeared to have peaked around 1.2255, with a potential rotation play bringing it below 1.20.
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