Dovish New Zealand Central Bank Policy Update Hits Currency "Hard", Says Mitsubishi UFG

06:59 AM EDT, 08/20/2025 (MT Newswires) -- The biggest mover overnight Tuesday was the New Zealand dollar (NZD), which has weakened sharply by over 1% against the US dollar (USD), said MUFG.

It has resulted in the NZD/USD rate falling back towards 0.5800 while AUD/NZD has risen above 1.1050, wrote the bank in a note. The "sharp" sell-off for the NZD was triggered by the Reserve Bank of New Zealand's (RBNZ) dovish policy update overnight. The RBNZ resumed its rate cut cycle by lowering its policy rate by a further 25bps to 3.00% after leaving the policy rate hold for the first time at the previous meeting in July.

While the decision to resume rate cuts was widely expected, the vote was more divided, with two out of six members even voting for a larger 50bps rate cut overnight, revealing a dovish shift in thinking, stated MUFG. At the same time, the updated policy communication was more dovish than expected as well, signaling clearly that the RBNZ is planning on delivering two further 25bps cuts by the end of this year.

It would lower the policy rate towards the bottom of the estimated range for the neutral policy rate between 2.5% and 3.5%. RBNZ Governor Christian Hawkesby stated that the RBNZ's updated forecast for the policy rate "troughs at around 2.5% by the end of this year...Whether we end up going faster or slower than that will be determined by developments."

The dovish policy communication reflects more concern over the recent loss of growth momentum, pointed out the bank. The RBNZ stated that "New Zealand's economic recovery stalled in the second quarter of this year" with spending by households and businesses constrained by global economic policy uncertainty, falling employment, higher prices for some essentials and declining house prices.

The unemployment rate had risen to a new cyclical high of 5.2% in Q2. The RBNZ's updated forecasts for economic growth were revised down to show growth of just 1.1% for the 12 months through to March 2026 compared with the previous forecast of 1.5%.

The RBNZ's more aggressive easing cycle continues to remain a headwind for NZD performance. The NZD and other commodity currencies have also been undermined by the deterioration in investor risk sentiment in recent days, added MUFG.

A sell-off in United States tech stocks has contributed to the NZD, Australian dollar (AUD) and Sweden's krone (NOK) underperforming this week, while the safe-haven currencies of the yen (JPY) and Swiss franc (CHF) have outperformed.

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