A new research paper from the Reserve Bank of New Zealand (RBNZ) looks at how businesses set prices and how this affects inflation. The study shows that companies’ price changes play a big role in inflation. Recent inflation trends have a greater impact on their pricing decisions than past data or expectations for the future.

Improving Inflation Forecasts

The research indicates that models using recent information do a better job than business surveys at predicting domestic or non-tradables inflation. This category includes areas like housing, education, and healthcare. Still, the paper advises considering all available methods because price-setting behaviors can evolve. Knowing when and how companies change their prices can help the Monetary Policy Committee understand how persistent inflation is and when it might return to the RBNZ’s 2% target. This understanding also aids in setting the Official Cash Rate (OCR) by shedding light on inflation trends. In summary, the paper suggests that paying attention to how businesses respond to recent inflation can boost forecast accuracy and help with interest rate decisions.

Market Implications

This strategy is especially effective in times following high or low inflation periods. As of August 4, 2025, the RBNZ is signaling a stronger emphasis on recent inflation data rather than future predictions. This change means that the upcoming quarterly CPI report will be crucial in shaping the Official Cash Rate (OCR). Any surprises in this report could lead to significant market adjustments. In July 2025, the latest inflation report showed that the headline CPI slightly decreased to 3.8%, but the key non-tradables component remained high at 4.5%. With the RBNZ’s fresh outlook, this ongoing domestic inflation suggests they may be more aggressive than market expectations indicate. The chances of an interest rate cut in the near term are decreasing. For derivative traders, this implies that contracts anticipating OCR cuts before early 2026 may be overpriced. It might be wise to position for a “hawkish hold” from the RBNZ for the rest of the year, possibly by paying fixed rates on interest rate swaps to bet on prolonged higher rates. The increased focus on single data points—like the CPI release—also raises the potential of options strategies. Implied volatility in the weeks leading to the next inflation announcement in October is likely to be underestimated. Purchasing straddles or strangles on short-term interest rate futures could be an effective way to prepare for significant market movements. Reflecting on the aggressive rate hikes of 2022-2023, we saw how decisively the RBNZ reacts to clear inflation signals. The current research suggests this reactive approach is now central to their strategy. Thus, we should anticipate their readiness to maintain the 5.5% OCR or even increase it further if the next inflation figures show little cooling. This policy is also expected to support the New Zealand dollar. As other central banks around the world hint at easing, a strong RBNZ makes the NZD more appealing. We can take advantage of this outlook by exploring long positions in NZD/AUD or NZD/USD futures, as the interest rate gap is likely to benefit the Kiwi. Create your live VT Markets account and start trading now.

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