New Zealand’s Producer Price Index (PPI) output rose 0.1% quarter-on-quarter in the fourth quarter.
The result was below the 0.7% increase expected.
Producer Price Pressures Easing Rapidly
The much lower-than-expected producer price inflation figure suggests price pressures are easing faster than we expected. This also suggests the Reserve Bank of New Zealand’s aggressive rate hikes through 2025 may be working more strongly than previously thought. We now need to take a hard look at how the market is pricing the path of the official cash rate (OCR).
This data challenges the view that the RBNZ must keep rates “higher for longer.” With wholesale inflation close to flat, the case for further tightening has faded. The focus is likely to shift quickly to when the first rate cut may happen. We should expect interest rate markets to start pricing a higher chance of an OCR cut before the end of the third quarter.
We saw a similar pattern last year. Fourth-quarter 2025 CPI came in at 4.7%, already below the RBNZ’s own late-2025 forecasts. This PPI result adds to that disinflation trend, especially since New Zealand’s GDP growth in the second half of 2025 was a weak 0.3%. The slowdown is clearly helping cool prices earlier in the supply chain.
As a result, we see a clearer path toward a weaker New Zealand dollar. If expectations for rate cuts move forward, the NZD’s yield advantage will shrink, especially versus the US dollar. We expect NZD/USD to face meaningful pressure in the coming weeks.
A simple strategy is to buy NZD/USD put options expiring in April or May. This gives downside exposure while limiting risk if the market moves against us in the short term. We are watching for a break below the 0.6050 support level that held through much of January.
Positioning For Lower Short Term Rates
We should also consider positioning for lower short-term interest rates using 90-day bank bill futures. Contracts for the second half of the year may be mispriced because they do not fully reflect the risk of multiple rate cuts. Buying these futures is a direct way to express the view that the RBNZ may need to act sooner than the market expects.
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