Reserve Bank of New Zealand chief economist Paul Conway said the bank sees lingering slack in the economy. Bloomberg reported this on Wednesday, in the context of higher oil prices and inflation.
The bank stated it still sees excess capacity, with the output gap remaining negative. It pointed to indicators including unemployment at 5.3%.
The bank said it will assess the broader data to judge the scale of second-round inflation effects from the oil price shock. It said this assessment will inform how strongly it responds, including the potential for Official Cash Rate (OCR) rises.
It also noted that market pricing can move independently of policy decisions. It said the Monetary Policy Committee reviews policy about every seven weeks, and decisions may or may not align with market expectations.
At the time of reporting, NZD/USD was down 0.15% on the day at 0.5827.
We are being told that the Reserve Bank of New Zealand sees significant weakness in the economy, which will temper its response to inflation. The mention of a negative output gap and high unemployment at 5.3% signals a reluctance to raise interest rates aggressively. This contrasts with the clear inflationary threat from rising oil prices.
Looking at the latest data, the unemployment rate of 5.3% is indeed concerning, sitting well above the 4.3% we saw at the end of 2025 and much higher than the sub-4% levels of previous years. With the latest quarterly CPI data still showing a stubborn 3.8%, well outside the target band, the central bank is caught in a difficult position. This is happening as WTI crude oil prices hover around $95 a barrel, consistently feeding into inflation expectations.
For derivative traders, this creates an opportunity to position for a potential dovish surprise from the Monetary Policy Committee in the coming weeks. The market may be pricing in rate hikes to fight inflation, but the central bank’s focus on economic slack suggests they could under-deliver. This points towards using options to bet against a strengthening New Zealand dollar, such as buying NZD/USD puts.
This situation is a shift from the sentiment we observed in late 2025, when the market was more confident in the RBNZ’s path to control inflation. Now, the explicit mention of economic slack introduces a significant level of uncertainty for the Official Cash Rate (OCR) going forward. The RBNZ is essentially warning us that its actions might not align with inflation-driven market expectations.
The bank has explicitly stated it can surprise the market, separating its actions from market pricing. This suggests volatility is likely around the next policy meeting. Traders should consider strategies that profit from this uncertainty, as the divergence between high inflation and a weak economy makes the RBNZ’s next move less predictable.
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