Westpac expects the Reserve Bank of New Zealand (RBNZ) to speed up its rate cuts. They predict that the Official Cash Rate will drop to 2.5% in October and then to 2.25% in November. The RBNZ may feel more pressure to act decisively as economic growth slows and inflation decreases. This outlook comes after disappointing news: New Zealand’s Q2 GDP fell by 0.9%, worse than the expected 0.3% decline. This situation allows for multiple rate cuts before the year ends.

Faster Interest Rate Cuts

We foresee a quicker pace for interest rate reductions from the RBNZ. The Q2 GDP report revealed a surprising contraction of 0.9%, which is significantly worse than the expected slight decline. This increases the pressure on the central bank to take action at its October and November meetings. Adding to this, inflation rates are also easing, with the latest figures showing annual inflation dropping to 1.8% in the third quarter, below the RBNZ’s target. Recent business outlook surveys for September indicate a drop in confidence, suggesting ongoing economic weakness. This gives the central bank a strong reason to ease policies more aggressively. For traders, this presents an opportunity to prepare for lower short-term interest rates. We suggest considering fixed two-year interest rate swaps as a good strategy. The market anticipates nearly a full percentage point of cuts over the next year. Additionally, purchasing call options on New Zealand government bond futures could be beneficial as bond prices rise and yields fall.

Impacts On The New Zealand Dollar

The outlook for the New Zealand dollar is negative. We expect the Kiwi to struggle against major trading partners, especially the US dollar. The currency has already fallen below the significant 0.5800 level this month, making it sensible to buy NZD/USD put options for further downside protection. We also anticipate increased volatility in both currency and rate markets ahead of the next RBNZ meeting. This environment favors option strategies that can benefit from large price movements, regardless of when the bank makes its announcements. A similar strategy was observed in the RBNZ’s 2019 easing cycle when they surprised markets with a bigger-than-expected cut to tackle a global slowdown. Create your live VT Markets account and start trading now.

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