RBNZ set for another interest rate cut amid trade tariff uncertainty

• The Reserve Bank of New Zealand is set to lower the interest rate by 25 bps to 3.5% on Wednesday.
• In February, the RBNZ left the door open for further cuts, anticipating the negative impact of US tariffs.
• The New Zealand Dollar could experience intense volatility following the RBNZ's policy announcements.

The Reserve Bank of New Zealand (RBNZ) is on track to deliver a 25 basis point (bps) cut to the Official Cash Rate (OCR), bringing down the key policy rate from 3.75% to 3.50% following its April monetary policy meeting on Wednesday. The decision is fully priced in and will be announced at 02:00 GMT.

Therefore, the language in the RBNZ's policy statement will be closely scrutinized for fresh insights on future rate cuts, which could significantly impact the performance of the New Zealand Dollar (NZD).

What to expect from the RBNZ interest rate decision?       

The RBNZ has already cut by 175 basis points since August last year, with the former Governor Adrian Orr having left the door open for rate cuts in April and May while addressing his post-policy meeting press conference in February.

At its February meeting, the central bank said that "there is a risk of increased trade barriers and broader geoeconomic fragmentation," adding that "an increase in trade restrictions is likely to reduce economic activity in New Zealand."

Earlier this month, United States (US) President Donald Trump announced his long-awaited reciprocal tariffs, with China hit by additional 34% levies while New Zealand faces 10% tariffs. The Pacific Nation said it will not retaliate. China leads the US as New Zealand's top export market.

Although the direct impact of US tariffs on New Zealand's economy is likely to be limited, the tariffs will probably lower growth in the country's main trading partners, including Australia and China, eventually acting as a headwind to the South Pacific Island nation.

The gloomier outlook on global growth could prompt the bank to retain its easing bias, with markets now expecting the OCR to bottom out at 2.75%, compared to 3% a week ago.

How will the RBNZ interest rate decision impact the New Zealand Dollar?

The NZD/USD pair is recovering from five-year troughs near 0.5500 in the run-up to the RBNZ showdown.

The short-covering or profit-booking rally in the pair could gather steam following the RBNZ's expected 25 bps rate decision.

The Kiwi Dollar could built on its recent recovery if the RBNZ warns of higher inflation due to tariffs, sounding cautious on the scope of future rate cuts.

However, amidst escalating US-China trade war and the associated risks to New Zealand's economy, should the RBNZ surprise with a 50 bps rate cut, the New Zealand Dollar (NZD) will likely crumble against the US Dollar (USD). 

"The NZD/USD pair remains exposed to downside risks as the 14-day Relative Strength Index (RSI) remains well below the 50 level, despite the latest uptick. If the downtrend resumes, the initial support is at the five-year low of 0.5506, below which the March 2020 low of 0.5470 will be targeted. If the selling pressure intensifies, the last line of defense for buyers is seen at the 0.5450 psychological level."

Any recovery attempt in the pair will require acceptance above the critical confluence resistance around the 0.5700 region, where the 21-day Simple Moving Average (SMA), the 50-day SMA, and the 100-day SMA converge. Further up, the April 4 high of 0.5803 will be tested en route to the 200-day SMA at 0.5894," Dhwani adds.