New Zealand’s Reserve Bank inflation expectations rose to 2.37% in the first quarter. This was up from 2.28% in the previous quarter.
The change was an increase of 0.09 percentage points quarter on quarter. The latest reading is based on the RBNZ’s Q1 survey measure of expected inflation.
Implications For RBNZ Policy
With inflation expectations rising to 2.37%, we see this as a clear signal that the Reserve Bank of New Zealand will be forced to maintain its hawkish stance. This reduces the probability of any interest rate cuts in the first half of 2026. Traders should anticipate a stronger New Zealand dollar (NZD) in the near term.
This latest data point is especially concerning for the RBNZ because it follows the Q4 2025 CPI reading, which came in at 3.1%, remaining stubbornly above the central bank’s 1-3% target band. The persistent price pressures suggest underlying inflation is not cooling as quickly as hoped. This reinforces the “higher for longer” narrative for New Zealand’s official cash rate.
In the interest rate swaps market, we expect to see the curve shift upwards, pricing out any dovish sentiment. Traders should look at positions that benefit from stable or rising short-term rates, such as paying fixed on 2-year swaps. Overnight Index Swaps (OIS) will now almost fully price out any chance of a rate cut before the third quarter.
For currency derivatives, this environment is supportive of the kiwi, especially against currencies with more dovish central banks like the Australian dollar. We anticipate increased demand for NZD/USD call options, with a focus on strikes above the 0.6400 level for the March and April expiries. Implied volatility may also tick higher ahead of the next RBNZ meeting on February 25th.
Historical Context And Market Positioning
Looking back to how markets behaved in 2023, we saw that the RBNZ was one of the last major central banks to pivot away from a hiking bias. This history suggests the Bank is willing to tolerate slower economic growth to ensure inflation returns to its target. This pattern supports long NZD positions against currencies where rate cuts are more actively being priced in.
