A new research paper from the Reserve Bank of New Zealand (RBNZ) examines the influence of businesses’ price-setting behaviours on inflation.
The study finds that how firms adjust prices is a major driver of inflation, with recent inflation having more impact on their decisions than future expectations or historical data.
Improving Inflation Forecasts
It is concluded that models using recent data perform better than business surveys in forecasting domestic or non-tradables inflation, which includes sectors like housing, education, or healthcare.
However, the paper suggests that all available tools should still be considered as price-setting behaviours can change over time.
Understanding firms’ timing and strategies in changing prices can inform the Monetary Policy Committee about the persistence of inflation and its return to the RBNZ’s 2% target.
This understanding influences decisions on setting the Official Cash Rate (OCR) by providing insight into inflation trends.
Overall, the paper suggests that focusing on how firms react to recent inflation trends can improve inflation forecasts and guide interest rate decisions.
Market Implications
This approach is particularly useful during periods following notably high or low inflation.
As of August 4, 2025, we should understand that the RBNZ is now signaling a stronger focus on recent inflation data over forward-looking surveys. This means the next quarterly CPI report will be the most critical piece of data influencing the Official Cash Rate (OCR). Any surprise in that release will likely trigger a significant market repricing.
The latest inflation figures from July 2025 showed that while headline CPI eased slightly to 3.8%, the crucial non-tradables component remains stubbornly high at 4.5%. Given the RBNZ’s new perspective, this persistent domestic inflation means we should expect them to remain more hawkish than market consensus might predict. The odds of an interest rate cut in the near term are therefore diminishing.
For derivative traders, this suggests that contracts pricing in OCR cuts before early 2026 may be overvalued. We should consider positioning for a “hawkish hold” from the RBNZ through the rest of the year. This could involve paying fixed on interest rate swaps to bet on rates staying higher for longer.
The increased importance of single data points like the CPI release raises the value of options strategies. Implied volatility in the weeks leading up to the next inflation announcement in October is likely to be underpriced. Buying straddles or strangles on short-term interest rate futures could be a prudent way to trade the expected sharp move.
Looking back to the aggressive hiking cycle of 2022-2023, we saw how decisively the RBNZ can act when faced with clear inflation trends. The current research suggests this reactive behaviour is now their primary model. Therefore, we should not underestimate their willingness to hold the 5.5% OCR steady, or even hike again, if the next inflation print does not show significant cooling.
This stance should also provide support for the New Zealand dollar. With other central banks globally signaling potential easing, a firm RBNZ makes the NZD attractive. We can express this view by looking at long positions in NZD/AUD or NZD/USD futures, as the interest rate differential is likely to move in the Kiwi’s favour.
