Markets expect a 25 basis point rate cut, which could lower the Reserve Bank of New Zealand’s Official Cash Rate to 3.00%. Current OIS pricing shows a 92% chance of this reduction. The RBNZ has hinted at this easing for some time, so this anticipated cut is not surprising. The focus now shifts to the bank’s guidance on future rate decisions.

The May Projection And Its Implications

In May, the RBNZ forecasted the OCR would be around 2.9% by the end of the year, suggesting two more cuts, including this week’s. They predicted the annual CPI would drop to 2.4% by year-end, then further to 1.9% in early 2026. However, recent inflation indicators, like rising food prices, are causing expectations to rise. Some analysts now predict inflation could hit around 3.0% by year-end or early next year, complicating the RBNZ’s plans. Markets are now pricing nearly 40 basis points in rate cuts by the end of the year. If the RBNZ cuts rates but signals no further reductions, volatility may occur. Some participants expect the OCR to lower further to allow for more cuts, making a stable OCR appear more aggressive. As of August 20, 2025, a 25 basis point cut from the Reserve Bank of New Zealand seems nearly certain. The derivatives market places the probability of this cut at over 90%, bringing the Official Cash Rate to 3.00%. The key focus will be the bank’s guidance on future moves.

Recent Data And Inflation Dynamics

The RBNZ’s own forecasts from May indicated another cut should happen later this year, but new data presents a different picture. Recent official data from July showed the Q2 annual CPI at 2.9%, higher than the RBNZ’s year-end projection of 2.4%. This persistent inflation makes further rate cuts more challenging. Inflation pressure is evident in recent figures, with the food price index for July reporting a 4.5% annual increase, the highest since late 2023. If inflation is now expected to approach 3.0% by year-end, the rationale for further easing weakens significantly. This creates a potential conflict between market expectations and the economic reality facing the RBNZ. The simplest trigger for volatility would be if the bank implements the anticipated cut but then indicates it is finished, raising its rate projections with no further easing this year. Many traders seem to expect a more dovish message, anticipating room for additional cuts. Therefore, an unchanged rate path could be viewed as a surprising aggressive stance. Traders in derivatives may want to position themselves for a policy divergence between New Zealand and Australia. The Reserve Bank of Australia recently delivered its first 25 basis point cut, bringing its cash rate to 4.10%. If the RBNZ pauses today while the RBA continues to cut, the New Zealand dollar is likely to strengthen against the Australian dollar. This view is backed by recent fundamental data, which showed a modest rebound in New Zealand’s Q2 GDP while Australia’s growth has slowed. Additionally, prices for New Zealand’s key dairy exports have firmed up, while the price for Australian iron ore has weakened. These trends in growth and trade support a potential decline in the AUD/NZD currency pair. Looking back from 2025, we see that the RBNZ was a leader in raising rates aggressively in 2022 and 2023 to control inflation. They might soon be one of the first major central banks to finish their easing cycle, contrasting with neighbors just starting to lower rates. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now