New Zealand’s Labour Cost Index for the fourth quarter registered a growth of 0.4%. This was below the expected rate of 0.5%.
This slower-than-expected increase in wage costs may impact inflation and future economic policies.
Faster Than Expected
With fourth-quarter 2025 wage growth coming in soft, we see this as a clear signal that inflationary pressures in New Zealand are abating faster than expected. This gives the Reserve Bank of New Zealand (RBNZ) a strong reason to adopt a more dovish stance in its upcoming meetings. The market will now begin to seriously price in the possibility of interest rate cuts occurring sooner than previously anticipated.
This outlook suggests traders should position for lower interest rates through derivatives. We expect the pricing on Overnight Index Swaps (OIS) to shift, showing a higher probability of a rate cut by the August 2026 meeting, which was previously seen as a remote possibility. Two-year swap rates, which recently hovered around 4.65%, could break below key support at 4.50% as traders anticipate a full easing cycle.
For currency traders, this data implies weakness for the New Zealand dollar. We anticipate the NZD/USD pair, currently trading near 0.6180, will face downward pressure, making put options with strike prices around 0.6100 and 0.6050 more attractive. Historically, when RBNZ rate cut expectations solidify, as they did in the second half of 2023, the Kiwi dollar has underperformed against the US dollar by an average of 2-4% over the subsequent quarter.
RBNZ’s Shift in Policy
This labour report amplifies the impact of other recent data, including the Q4 2025 GDP figures from December which showed a near-stagnant economy with just 0.1% growth. With both economic activity and wage pressures now weakening, all eyes will be on the RBNZ’s Monetary Policy Statement later this month. We believe the bank’s forward guidance will shift materially, opening the door for easing in the second half of the year.
