21.07.202611:32 Forex Analysis & Reviews: NZD/USD: RBNZ likely to hike despite weak economy

The inflation report for Q2 2026, released on July 20, proved decisive in strengthening expectations for further monetary tightening by the Reserve Bank of New Zealand (RBNZ). In turn, that provides substantial support to the New Zealand dollar, especially as markets now expect US Fed interest rates to remain unchanged.

The inflation data surprised on the upside. Annual consumer prices accelerated to 4.1% from 3.1% in Q1, beating both the economists' consensus (4.0%) and the RBNZ's own forecast (3.9%). Sequentially, prices rose 1.5% versus the 1.4% forecast.

Details of the report indicate the inflationary pressure is strongly external. The key driver was fuel price inflation amid the Middle East war: petrol spiked 27.5% year-on-year, and diesel jumped 71.1%; excluding this factor, annual inflation would have been just 2.9%.

After a period of slowdown, New Zealand's economy is showing signs of recovery, helped by prior easing of monetary policy. However, the rebound remains fragile due to weakening domestic demand, falling business confidence, and the negative impact of the energy shock.

The inflation print cemented market expectations of further rate hikes. Let me remind you that on July 8, the RBNZ raised the official cash rate by 25 basis points to 2.50% — its first increase in three years — and signalled readiness to tighten further; the inflation report has reinforced those expectations. Traders are pricing additional rate hikes for October or December 2026, and another in February 2027.

Major banks differ on the timing and magnitude, but agree on the overall direction. HSBC expects 25 bp hikes each quarter, bringing the rate to 3.50% by Q3 2027. Westpac also forecasts increases in September and December 2026, but predicts a higher peak of 4.0% by September 2027. ANZ expects two consecutive rate hikes in September and October.

Given that inflation has materially exceeded the target range (1–3%) and is at a two-year high, the probability of further RBNZ tightening is high. The RBNZ is likely to act cautiously, however, given the fragile recovery. In any case, the fundamental backdrop currently favors the New Zealand dollar.

Speculative positioning in NZD changed little over the reporting week: the net short position stands at -$3.68 billion, but given the inflation report, we expect short positions to be cut in the coming weeks. The implied price is attempting to turn upward.

The inflation print and revised rate outlook substantially improve the bullish case for NZD/USD. We no longer expect a drop to 0.5621; a more likely scenario is a move toward the May high at 0.5988. Potential obstacles to that path include hawkish or cautionary comments from RBNZ officials or a deterioration in geopolitics and external trade conditions.