Currency analyst questions timing of monetary policy easing
The Reserve Bank of New Zealand may have made a “monetary policy error” by cutting interest rates too aggressively in late 2025, according to commentary published on interest.co.nz.
Roger J Kerr, executive chairman of Barrington Treasury Services NZ Limited, argued the central bank should have anticipated stronger economic conditions and persistent inflation before reducing the official cash rate to 2.25% in November.
Economic indicators shift
New Zealand’s economy recorded 1.2% gross domestic product growth in the September 2025 quarter, with expectations of similar expansion in subsequent quarters. The strength caught forecasters off guard, as most bank economists had predicted the Reserve Bank needed to cut rates to 2.00% or lower through the second half of 2025.
“The RBNZ were busy cutting interest rates over the second half of 2025 when the economy was already growing at a fast clip,” Kerr wrote in the 26 January commentary.
Market pricing now suggests the central bank may need to raise rates twice in 2026, potentially starting in June or September. Two-year swap interest rates have increased 0.50 percentage points since 1 December 2025, rising from 2.60% to 3.10%.
Currency movements
The New Zealand dollar jumped more than two cents over 10 days, moving from 0.5730 against the US dollar on 14 January to 0.5950 on 26 January. Kerr noted the appreciation reflected both a reassessment of New Zealand’s economic outlook and broader US dollar weakness.
The commentary suggested the time between rate cuts and potential increases would be unusually short. Historical patterns show interest rates typically remain stable for 12 to 15 months following an easing cycle, but the current situation could see changes within seven months.
Inflation concerns
Inflation remained above the Reserve Bank’s 3.00% upper target limit during the rate-cutting period. Kerr’s analysis indicated much of New Zealand’s inflation stems from supply-side factors, including government charges and costs in sectors such as electricity, transport, and insurance.
The commentary compared the situation to Australia, where the Reserve Bank of Australia faced similar pressure to reverse course on monetary policy after earlier rate cuts.
Bank economists who previously advocated for aggressive easing have shifted their forecasts, now calling for rate increases later this year.
Kerr noted that the Reserve Bank, led by Governor Anna Breman, has not yet responded to suggestions it eased policy too far.
