06:29 AM EST, 02/19/2025 (MT Newswires) -- The New Zealand dollar (NZD) has been one of the biggest movers during the Asian trading session following the Reserve Bank of New Zealand's latest policy meeting, said MUFG.

NZD/USD initially fell to an intra-day low of 0.5678 after the RBNZ delivered a third consecutive 50bps rate cut lowering the policy rate to 3.75% but has since fully reversed those losses rising up to a high of 0.5729, wrote the bank in a note to clients.

The New Zealand dollar staged a rebound after the RBNZ signaled that it plans to slow the pace rate cuts going forward, pointed out MUFG. RBNZ Governor Adrian Orr stated that they are likely to deliver smaller 25bps rate cuts at the next two policy meetings in April and May.

More specifically he told reporters that "we are looking at lowering the Official Cash Rate a little bit quicker than what we projected back in November, but that's around 50 basis points by mid this year." The governor went on to add that it "comes broadly in two 25 basis point steps. It doesn't stop there. We have our projection of the OCR being around 3.00% by year end."

The updated forecasts from the RBNZ show the OCR falling to an average of 3.14% by year-end which was lower than the forecast set back in November of 3.55%. The RBNZ's updated forecasts then show the OCR settling at 3.10% in early 2026 where it remains for the rest of the forecast horizon.

The RBNZ has previously estimated that the long-term nominal neutral interest rate currently lies between 2.50% and 3.50%, recalled the bank. The updated guidance has triggered a hawkish repricing in the New Zealand rate market which has moved more into line with the RBNZ's plans for more gradual rate hikes through the rest of this year.

The RBNZ's decision to continue cutting rates reflects more confidence that inflation will be sustained within its 1.0% to 3.0% target range and that core inflation will continue to converge toward the mid-point, stated MUFG. The RBNZ believes that the period of restrictive rates has reduced demand in New Zealand and contributed to lower inflation.

Inflation is expected to pick up in the coming quarters but within the target range and isn't expected to alter the RBNZ's plans for further gradual rate cuts this year, added the bank. The RBNZ's ability to look through a temporary pick-up in inflation is supported by its updated estimates showing more economic slack in New Zealand's economy than it had forecast back in November.

The RBNZ's estimate of the output gap at the end of last year was raised to -1.7% of gross domestic product up from their November estimate of the output gap in Q3 2024 at -1.5% of GDP. If more economic slack continues to open up than the RBNZ is expecting it will increase pressure to lower rates below neutral in the coming years, according to MUFG.