Bank of America analysts have revised their forecasts for the New Zealand dollar (NZD), projecting a downward trend against the Australian dollar (AUD) as interest rate differentials between the two countries are expected to widen. The revision follows a period of stability for the AUD/NZD pair, despite signs of economic divergence between Australia and New Zealand.
The analysts highlighted that the Reserve Bank of Australia (RBA) is anticipated to cut rates earlier than previously thought, now in February 2025 instead of April 2025.
However, the risks are tilted towards a higher inflation and interest rate profile for Australia in the following years. This contrasts with the Reserve Bank of New Zealand (RBNZ), which is expected to aggressively ease policy due to fiscal consolidation and falling asset prices in New Zealand.
As a result of these developments, Bank of America now forecasts the NZD to end the year at 0.62, revised from the previous estimate of 0.60, and to reach 0.63 by the fourth quarter of 2026, up from the earlier prediction of 0.61.
The AUD/NZD is projected to rise to 1.13 by the fourth quarter of 2025 and further to 1.16 by the fourth quarter of 2026, adjusted from previous forecasts of 1.10 and 1.13, respectively.
These revisions reflect Bank of America's view that the growing policy-rate differentials are likely to act as a significant headwind for the NZD, while supporting a higher valuation for the AUD against its trans-Tasman counterpart in the coming years.
