The Reserve Bank of New Zealand (RBNZ) has shifted its outlook in the latest August policy report, indicating new concerns about economic growth despite projecting higher inflation rates. In May, the bank had anticipated two interest rate cuts for the year, including the recent one.
The current Official Cash Rate (OCR) suggests that two more cuts may occur, one by the end of this year and another in the first quarter of 2026. The bank’s dovish stance is influenced by its revised perspective on growth and the labour market.
Revised Growth Projections
Despite an inflation increase, the growth forecast for 2026 has dropped from 1.5% to 1.1%, alongside a lower projected output gap. Employment figures have also been adjusted, with total employment in 2026 now projected at 0.8%, down from a previous estimate of 1.8%.
Additionally, the unemployment rate forecast for 2026 has increased slightly from 5.0 to 5.2. Overall, the RBNZ presents a more cautious outlook compared to its May forecasts.
The Reserve Bank of New Zealand has signaled a more dovish stance than we previously anticipated. The bank now sees scope for two more rate cuts, one by the end of this year and another in early 2026. This is a significant shift from the single cut we expected after today’s move.
This change comes even as the RBNZ projects higher inflation, because its concerns about economic growth are now much greater. The latest GDP figures for Q1 2025, which we saw back in June, already showed a contraction of 0.2%, supporting this pessimistic outlook. The bank has lowered its 2026 growth forecast and expects unemployment to rise more than previously thought.
Implications for Traders
For derivatives traders, this points towards positioning for a weaker New Zealand dollar in the coming weeks. We saw the household labour force survey for the June quarter show unemployment already ticking up to 4.9%, confirming the trend the RBNZ is now forecasting. Options strategies that benefit from a falling NZD/USD, such as buying puts, are likely to be favored.
We should also anticipate that New Zealand interest rate markets will continue to price in these future cuts. This suggests opportunities in instruments like interest rate swaps, where receiving a fixed rate would be profitable as the official cash rate falls. This pivot is reminiscent of the easing cycle we observed back in 2019, when slowing global growth prompted a similar pre-emptive shift in policy.
Given the recent Q2 2025 CPI data still showed inflation at 3.1%, the RBNZ is clearly prioritizing growth over its short-term inflation fight. Traders should therefore be wary of any data that challenges this growth narrative, as it could cause a sharp reversal. The focus will be squarely on upcoming employment and activity indicators to confirm the bank’s new path.
