KiwiBank predicts that the Reserve Bank of New Zealand will lower interest rates by 50 basis points in October and another 25 basis points in November. This would bring the cash rate down to 2.25% by the end of the year. The forecast is based on the economy’s slow recovery from a previous recession, which is evident in recent weak GDP data. If economic conditions do not improve, further cuts to 2% might be necessary. KiwiBank estimates a 50% chance that more monetary support will be required. The recent GDP numbers show that 10 out of 16 industries are shrinking, which suggests the expected recovery is not happening one year after a severe recession.

Call For Strong Measures

KiwiBank is urging the Reserve Bank to take strong actions to boost growth. This forecast emphasizes the urgent need for the Reserve Bank to make policy changes quickly as economic growth slows. If the current weakness persists, a cash rate drop to 2% could be on the table. With the outlook for more significant rate cuts, we should prepare for a lower interest rate environment in the upcoming weeks. Focus will be on derivatives that benefit from falling rates, such as receiving fixed in Overnight Index Swaps (OIS) that account for the October and November meetings. This perspective is supported by recent data showing the economy contracted by 0.2% in the second quarter of this year, reinforcing the need for decisive action from the RBNZ. A significant drop in the official cash rate will likely drive the New Zealand dollar down. We saw a similar pattern during the 2008-2009 easing cycle, when aggressive rate cuts caused the NZD/USD exchange rate to fall sharply. Traders may want to consider using currency options, such as buying NZD puts, to prepare for a weaker kiwi dollar through the end of the year.

Market Volatility And Future Moves

The shift from a gradual easing approach to rapid rate cuts is likely to increase market volatility. After focusing on inflation for a long time, this shift to prioritize growth is a notable change. This makes long volatility strategies, like buying straddles on short-term interest rate futures, potentially appealing. Looking ahead, the entire New Zealand yield curve is expected to flatten and decrease as the market anticipates the cash rate might reach 2.0%. This suggests we should consider trades that capture this broader movement, such as receiving fixed on two-year interest rate swaps. Create your live VT Markets account and start trading now.

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