Explanation:

Uncovered interest rate parity (UIP) states that the expected change in the exchange rate should equal the interest rate differential between two countries.

Formula: %ΔS(expected) = i_foreign - i_domestic

Where:

• %ΔS(expected) = expected percentage change in spot exchange rate (foreign currency per domestic currency)
• i_foreign = foreign interest rate
• i_domestic = domestic interest rate

Given:

• NZD (domestic): 6.25%
• GBP (foreign): 7.50%

Expected NZD appreciation = 7.50% - 6.25% = 1.25%

Since NZD has the lower interest rate, uncovered interest rate parity predicts it should appreciate relative to GBP by the interest rate differential of 1.25%.