The Reserve Bank of New Zealand is likely to cut its official cash rate by 25 basis points to 3% in its policy meeting on August 20, as reported in a Reuters poll. This poll, conducted from August 11 to 14, showed that 28 out of 30 economists expect the rate cut, with only two predicting no change. In July, the central bank kept the rate at 3.25% but indicated a readiness to lower it if inflation stays stable. Annual inflation dropped to 2.7% in the June quarter, which is within the RBNZ’s target range of 1–3%. However, the unemployment rate rose to 5.2%, the highest level since late 2020.

Economists’ Predictions

Economists view the upcoming rate cut as part of the final stage of the RBNZ’s easing cycle. ASB and Westpac believe there will be no further cuts after August, while BNZ projects a drop to 2.75% by the end of 2025. ANZ and Kiwibank expect the rate to reach 2.50% next year. The median forecast suggests a further decrease to 2.75% in the first quarter of 2026, slightly sooner than earlier predictions from July. With the market nearly certain about a 25 basis point cut on August 20, this expectation is already reflected in current asset values. Therefore, our focus is on the Reserve Bank’s forward guidance. The real opportunity will lie in any surprising statements about future cuts. The key question is whether this will be the last cut or just a pause before additional easing in late 2025 or early 2026. Recent data showing sluggish GDP growth of 0.4% in the second quarter of 2025 and a drop in global dairy prices of over 5% since June supports the case for more cuts. The RBNZ’s commentary on these weakening conditions will be crucial for market movement next week.

Market Strategy

We recommend focusing on interest rate derivatives, especially options on 90-day bank bill futures. If the RBNZ indicates a greater likelihood of reaching a 2.75% cash rate by year-end, we anticipate futures prices will rise. A straddle—buying both a call and a put option—could be a smart strategy to capitalize on potential significant market moves, whether the bank’s tone turns out to be more dovish or hawkish than expected. This view also affects the New Zealand dollar. Recall that the currency dropped over 1.5% in one day in August 2019 after the RBNZ unexpectedly cut rates by 50 basis points. While a surprise of that magnitude is unlikely now, any indication of a quicker or larger cutting cycle than currently expected could push the NZD/USD exchange rate down towards its year-to-date lows. Given the uncertainty, we are looking at implied volatility in the currency options market. Current volatility is moderate, suggesting the market might be underestimating the potential for a sharp reaction to the RBNZ’s statement. Buying NZD/USD put options provides a defined-risk way to prepare for a dovish surprise from the central bank. Create your live VT Markets account and start trading now.

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