The Reserve Bank of New Zealand (RBNZ) has updated its outlook in the August policy report. It now shows increased worries about economic growth, even as inflation rates are predicted to rise. Back in May, the RBNZ expected to cut interest rates twice this year, including the recent cut. The current Official Cash Rate (OCR) hints that we could see two more cuts: one by the end of this year and another in early 2026. The RBNZ’s shift in tone stems from its new views on growth and the labor market.

Adjusted Growth Predictions

The growth forecast for 2026 has decreased from 1.5% to 1.1%, with a smaller expected output gap. Employment forecasts have also changed. Total employment for 2026 is now projected to be 0.8%, down from the earlier estimate of 1.8%. Additionally, the unemployment rate for 2026 is expected to rise slightly from 5.0% to 5.2%. Overall, the RBNZ is adopting a more cautious outlook compared to its May estimates. The Reserve Bank of New Zealand has taken a more dovish approach than expected. It now sees room for two more rate cuts: one before this year ends and another in early 2026. This is a notable change from our earlier expectation of just one cut following today’s decision. This adjustment occurs even as the RBNZ predicts higher inflation, because it is now more worried about economic growth. The latest GDP data for Q1 2025, released in June, already showed a decline of 0.2%, reinforcing this pessimistic view. The bank has lowered its growth forecast for 2026 and now expects unemployment to rise more than initially thought.

Impact on Traders

For derivatives traders, this suggests a weaker New Zealand dollar in the coming weeks. The household labor force survey for the June quarter showed unemployment rising to 4.9%, which aligns with the RBNZ’s current expectations. Options strategies that benefit from a falling NZD/USD, like buying puts, are likely to gain popularity. We can also expect that New Zealand interest rate markets will factor in these anticipated cuts. This creates opportunities in instruments like interest rate swaps, where locking in a fixed rate would be beneficial as the official cash rate declines. This situation mirrors the easing cycle seen in 2019, when slowing global growth led to a similar pre-emptive policy shift. Even with Q2 2025 CPI data showing inflation at 3.1%, it’s clear the RBNZ is prioritizing growth over short-term inflation control. Traders should be cautious of any data that could contradict this growth narrative, as it may lead to sudden changes in the market. All eyes will be on upcoming employment and activity indicators to validate the bank’s new direction. Create your live VT Markets account and start trading now.

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