The NZIER shadow board suggests a 25 basis point cut in interest rates during this week’s meeting. Market pricing indicates a 95% probability of such a reduction.
Last week, a Reuters poll revealed that 28 out of 30 economists anticipate the Reserve Bank of New Zealand will lower the cash rate to 3% on 20 August. This aligns with previous expectations for the central bank’s upcoming meeting.
Current Market Expectations
As of August 17, 2025, the market is pricing in a firm hold from the Reserve Bank of New Zealand this week. However, about a 15% probability of a rate cut is still reflected in overnight index swaps. This lingering dovishness presents a potential opportunity for traders.
We remember a very different situation back in August 2015, when the market was almost 95% certain of a rate cut, which the RBNZ delivered as expected. Today, the economic data tells a completely different story. The environment is not set up for the central bank to ease policy.
The most recent CPI data for the second quarter of 2025 showed inflation at a stubborn 3.2%, which is still outside the RBNZ’s 1-3% target band. This persistent inflation makes it very difficult for the bank to justify a rate cut. The path back to the 2% midpoint has been slower than many anticipated at the start of the year.
Furthermore, the labour market remains tight, with the latest data from July showing unemployment at just 4.1%. A strong jobs market gives the RBNZ cover to keep rates higher for longer to ensure inflation is fully contained. This contrasts sharply with periods in the past where rising unemployment forced the bank’s hand.
Trade Opportunities
For derivatives traders, this suggests positioning for a hawkish hold from the RBNZ. We could look to sell front-end interest rate futures or receive fixed on swaps dated further out, betting that the market will have to price out any remaining chance of a near-term cut. The risk is that the bank’s statement is surprisingly soft, but the recent data makes this a lower probability outcome.
In the coming weeks, the focus should be on the RBNZ’s forward guidance. If the bank signals that rates will stay at this level well into 2026, it will cause a repricing across the yield curve. This would support trades that profit from short-term rates remaining anchored at current levels.
