The Reserve Bank of New Zealand is expected to reduce its official cash rate by 25 basis points to 3% during its policy meeting on 20 August. This expectation arises from easing inflation and a softening labour market, according to a Reuters poll. The poll from 11-14 August found that 28 out of 30 economists anticipate the rate cut, with only two predicting no change.
In July, the central bank maintained rates at 3.25%, indicating a willingness to ease should inflation remain stable. Annual inflation slowed to 2.7% in the June quarter, aligning with the RBNZ’s target range of 1–3%. Meanwhile, the unemployment rate increased to 5.2%, the highest since late 2020.
Economists Forecast
Economists consider the impending rate cut as part of the final phase of the RBNZ’s easing cycle. ASB and Westpac foresee no additional cuts after August, while BNZ anticipates a decrease to 2.75% by the end of 2025. ANZ and Kiwibank project a 2.50% rate next year. The median forecast suggests a further reduction to 2.75% in the first quarter of 2026, slightly earlier than prior predictions in July.
With the market almost certain of a 25 basis point cut on August 20, the move itself is already priced into current asset values. Therefore, we are not focused on the rate decision, but on the tone of the Reserve Bank’s forward guidance. The real opportunity will come from any surprise in the statement about the path of future cuts.
The key debate is whether this is the final cut or just a pause before more easing in late 2025 or early 2026. Supporting the case for more cuts, we’ve seen recent data showing GDP growth in the second quarter of 2025 was a sluggish 0.4%, and global prices for dairy, a key export, have fallen over 5% since June. The RBNZ’s commentary on these weakening conditions will be what moves the market next week.
Market Strategy
For us, this points to positioning in interest rate derivatives, particularly options on 90-day bank bill futures. If the RBNZ signals a higher chance of reaching a 2.75% cash rate by year-end, we would expect futures prices to rally. A straddle, buying both a call and a put option, could be a prudent strategy to trade the potential for a significant move regardless of whether the bank’s tone is more dovish or hawkish than anticipated.
This outlook also has clear implications for the New Zealand dollar. We remember how the currency fell over 1.5% in a single day back in August 2019 when the RBNZ delivered a surprise 50 basis point cut. While a surprise of that scale is unlikely now, any language suggesting a faster or deeper cutting cycle than currently priced in could push the NZD/USD exchange rate down towards its year-to-date lows.
Given the uncertainty, we are looking at implied volatility in the currency options market. Volatility is currently moderate, suggesting the market may be underestimating the potential for a sharp reaction to the RBNZ’s statement. Buying NZD/USD put options offers a defined-risk way to position for a dovish surprise from the central bank.
