The RBNZ delivered a 25bp cut to 3.00% but revealed a serious debate over a larger 50bp move, sending NZD/USD down 1.1%. With spare capacity in labour and business offsetting near-term inflation risks, markets now expect a lower terminal rate around 2.50%, underscoring the potential for further easing ahead, ING's FX analyst Chris Turner notes.

New Zealand unemployment rate has risen to 5.2% from 3.2%

"While delivering the much-anticipated 25bp cut to 3.00%, the RBNZ seriously debated a 50bp cut – for which two of the six committee members voted. NZD/USD fell 1.1% and the terminal rate for the easing cycle was marked some 20bp lower, close to 2.50%. Despite acknowledging that CPI would increase to and possibly breach the top of its 1-3% target range in the next quarter, the RBNZ felt that the spare capacity, both in labour and business, meant that inflation wouldn't stick and would be lower next year."

"The backdrop is that the New Zealand unemployment rate has risen to 5.2% from 3.2% over the last three years. The RBNZ also felt that US tariff uncertainty might be reducing the effectiveness of rate cuts, where uncertainty continues to depress business investment."

"We mention all this because of the battles being faced by both the Fed and the Bank of England in terms of how to react to higher short-term inflation. Certainly, neither has the same spare capacity in labour markets as New Zealand does. But the reaction in NZD FX and rates markets today serves as a reminder that if the labour market shows serious signs of softening, doors open for central banks to cut rates back to neutral or even below neutral. That's why we're bearish on the dollar and, to a lesser degree, sterling in 2026."