Well, that was quite the week. Trump’s long awaited “Liberation Day” has left markets in mayhem. The scope and scale of the so-called ‘reciprocal tariffs’ were worse than feared. The US has imposed the baseline 10% tariff on over 90 countries and territories (inhabited or otherwise). While a harsher treatment was issued to countries with which the US holds a larger trade deficit. Indeed, it should be noted that such “reciprocal rates” appear to have been calculated on the basis of a country’s trade balance with the US, as opposed to a true reciprocal rate.

Aotearoa has been lumped in with our Tasman cousin and the other 90 or so countries with a 10% tariff. While China and many of the emerging Asian economies have been hardest hit. Cambodia and Vietnam have copped the highest tariffs at 49% and 46%, respectively. While China’s average rate has lifted to almost 70%, if combining its 34% reciprocal tariff, the 20% tariff already in place as well as the existing tariffs pre-Trump.

Now the focus turns to retaliatory action. Some are already striking back, like Canada and China. And it’s getting serious. On Friday, China announced it will impose a 34% tariff on all US imports and tighten its export controls on its rare-earth minerals. The EU is also rumoured to be planning a response. Other (at least 50) countries are reportedly looking to negotiate a better reciprocal rate. Globalisation as we know it, hangs in the balance (see COTW).

The market reaction has been swift. Wholesale rates have moved decisively lower. Kiwi rates have gone from factoring in a terminal RBNZ cash rate of 3%, to pricing in a good chance of another two cuts to 2.5%. Given the balance of risks, it’s perfectly reasonable. While some commentators are warning of near term inflation and the need to hold rates higher, they’re missing the big picture. Tariffs hurt growth, global growth. And risks of recessions in our largest trading partners will force central bankers to cut (not hike). With this in mind, the pivotal 2-year swap rate, used by banks to price 2-year mortgage fixed rates, has dropped from 3.45% last week, to 3.10% this morning. Meanwhile, the Kiwi has fallen back below 56c. And we’re still finding our way. More countries will retaliate, and we could see further falls across interest rates and (risk) currencies.

Above all the noise, this week we’re looking to the RBNZ’s (MPR) decision on Wednesday. Rates traders are placing small bets on a 50bp move (25% chance). And why not? The risks to the downside dominate, and at 3.75% we’re far from a neutral setting, with possible need for a stimulatory setting. The mayhem in markets has seen traders pricing in a terminal rate of 2.65%, down from 3% last week. So another cut to 2.75% is fully priced, with a further 40% chance of a final cut to 2.5%. That’s a massive move.

A 25bp rate cut this week was “baked into the cake” so to speak, before Liberation day. The cake is still sour, not yet sweet. Monetary policy is still restrictive, far from stimulatory. We have recorded a deep, prolonged, and painful recession. Interest rates should be at a neutral setting, around 3%, at least. And a good argument, even sounder now off the back of escalating trade tensions, is being made for a slightly stimulatory position, around 2.5%. We are crawling out of this recession. Policy should be set to get the economy back on its feet and running in the right direction.

Our central scenario still sees the Kiwi economy gradually recovering over the second half of this year. More timely data are already showing promising signs of a turnaround in activity. From PMIs popping into positive territory to healthy export earnings for the rural sector, greenshoots are emerging. However, more than ever, we’re seeing the risks as clearly skewed to the downside for the economy.

Like its peers, we expect the RBNZ to acknowledge these global risks. The beginnings of our economic recovery – as fragile as it is – has largely been driven by the external sector. A disruption to global trade does not bode well for the Kiwi ‘small, open’ economy. An escalation of the tariff trade war, should more countries retaliate, could stall our expected economic recovery. And such a scenario would require the RBNZ to push the cash rate below 3%.

Financial Markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In rates, the ‘worst case’ scenario sees Kiwi rates rally

“In the calm before the tariff storm NZ rates remained rangebound. Domestically, the focus was on the NZGB syndication, with NZDM taking advantage of the final bit of clear air for some time to get away $4bio of 2032s.

The tariff announcement from the Rose Garden was the worst-case scenario of most forecasters, and the worst case for most countries and businesses. Though inflationary, bond markets see the downward shock to growth as the dominant impact of the tariff policy. And the US 10 year has dropped below the key 4% level. On Friday, China imposed 34% reciprocal tariffs further damaging the outlook for global growth.

In NZ rates there was a bit of delayed reaction with a relatively muted reaction on Thursday post the announcement. However, Friday saw a sharp drop with a 10bps rally across the curve. Breaking through recent lows, the 2 year is now sitting at 3.19%.

Looking forward to this week. this will be the most dramatic global backdrop for a MPR in some time. Most still see a 25bps cut as the overwhelmingly likely outcome. However, May now looks to be live with risks to recovery tipping back to the downside. A number of banks have changed their call for RBA’s May meeting off the back of the tariffs. We wouldn’t be surprised to see a few change their call for the RBNZ here as well. The short end is now pricing 93bps of cuts into this year vs around 65bps at the start of the week." Matthew Crowder, Balance Sheet Manager – Treasury

In currencies, tariffs cause a meltdown for the US Dollar

“Well, it was quite the week last week with the introduction of wide sweeping tariffs by the US Administration. Ultimately, what initially looked like a benefit to the US economy, quickly turned sour. The US dollar was unceremoniously dumped across the board, as it is no longer seen as a safe haven in the current environment. It is becoming clear that the US protectionist strategy may be akin to shooting yourself in the foot. Global growth expectations are being revised further downwards, and concerns around the impact to the US economy, which had previously been the best performer by far in the G10, are growing rapidly. The US dollar index got to a low of 101.27 in the day following the release. It is looking quite likely that the US has stoked a full blown trade war, with the EU, China and Canada all imposing retaliation tariffs. Also the overall rhetoric fairly hardnosed, with US Treasury Secretary, Scott Bessent, effectively warning countries not to retaliate. A full trade war may yet be avoided via convoluted negotiations, but in the absence of solid information and known outcomes, the market is reacting as it usually does to uncertainty, and is dumping risk. The battered US dollar meant that the Kiwi had a strong rally, up to a high of 0.5853 after prior trading around a base of 0.5700/0.5750. This was short lived however, with China’s retaliation meaning a huge risk off move again for both the Aussie and Kiwi dollars, and we traded down to a low of 0.5552 on Friday, before closing the New York session at 0.5597. The better than expected US nonfarm payrolls print on Friday added further to volatility, with the US dollar index rallying back to 103. Meanwhile the Euro had a 6 month high on the tariff announcements, which has pushed the NZD/EUR cross lower to 0.5101 on Friday. NZDAUD has had a decent rally, with the Aussie economy perceived as more exposed to trade war complications. NZDAUD hit a high of 0.9281 on Friday, finally seeing this cross move outside of very tight ranges. What do we expect to happen this week? More chaos really. Possibly the US dollar may have a further relief rally but current themes of the US dollar now being a ‘risk asset’ will likely prevail. ” Mieneke Perniskie, Trader - Financial Markets.

Weekly Calendar

• The RBNZ is widely expected to deliver a 25bps cut to the cash rate, bringing it to 3.25%. The move follows three consecutive 50bps rate cuts. In light of the recent developments surrounding US trade policy, the RBNZ's commentary on the global backdrop will be of primary interest. The newly announced so-called 'reciprocal tariffs' appear worse than feared, particularly for the likes of China and many Southeast Asian countries. A disruption of global trade risks stalling the expected recovery of the NZ economy.
• Ahead of the RBNZ's policy decision, NZIER will publish its Quarterly Survey of Business Opinion for the March quarter. Business confidence has markedly improved since the RBNZ began cutting interest rates. However current activity indicators remain subdued. Investment intentions are also still weak, naturally tied to corporate profitability that has taken a hit with rising costs. Greenshoots are emerging, namely within the primary and tourism sectors, which may be grounds for a lift in business confidence in Q2. However, those domestic greenshoots must be balanced against the confusion and resulting volatility surrounding US tariffs.
• For financial markets, US CPI is the main data release. The US has struggled to get inflation sustainably below 3% and closer to the target 2%. The imposition of tariffs will likely lead to a rise in costs for US businesses. The US Fed has marked the reacceleration in inflation as temporary. But inflation expectations will be the key determinant of the level of persistence of a tariff-fuelled rise in inflation.
• The latest China CPI is due out next week and will likely show consumer prices lifted marginally in March. The annual rate is expected to rise from deflationary territory (-0.7%) to a print of 0.1%. The Chinese economy is struggling to grow as household consumption remains weak.

See our Weekly Calendar for more data releases and economic events this week.