Westpac now anticipates the Reserve Bank of New Zealand will accelerate its easing cycle, forecasting the Official Cash Rate to be reduced to 2.5% in October and further to 2.25% in November. The bank notes the RBNZ may face increasing pressure to adopt a more assertive approach as economic growth decelerates and inflation eases.
This expectation follows disappointing data with New Zealand’s Q2 GDP contracting by 0.9% quarter-on-quarter, compared to a forecasted decline of 0.3%. The current economic situation provides room for consecutive rate cuts before the end of the year.
Faster Interest Rate Cuts
We now see a much faster path for interest rate cuts from the Reserve Bank of New Zealand. The recent Q2 GDP report was significantly worse than anticipated, showing a contraction of 0.9% against forecasts of a mild 0.3% dip. This puts immense pressure on the central bank to act decisively at its October and November meetings.
This weak growth figure is compounded by easing price pressures, with the latest data showing annual inflation falling to just 1.8% in the third quarter, below the RBNZ’s target midpoint. Recent business outlook surveys for September also show confidence has plummeted, suggesting the weakness will continue. This provides the central bank with a clear justification for more aggressive policy easing.
For traders, this signals an opportunity to position for falling short-term interest rates. We believe receiving fixed on two-year interest rate swaps is an attractive strategy, as the market is now pricing in nearly a full percentage point of cuts over the next year. Buying call options on New Zealand government bond futures could also profit from a rally in bond prices as yields fall.
Impacts On The New Zealand Dollar
The implications for the New Zealand dollar are clearly negative. We expect the Kiwi to remain under pressure against its major trading partners, particularly the US dollar. The currency has already broken below the key 0.5800 level this month, and positioning for further downside by buying NZD/USD put options seems prudent.
Volatility in both currency and rate markets is likely to increase ahead of the next RBNZ meeting. This environment favors option strategies that can profit from large price swings, regardless of the exact timing of the bank’s announcements. We saw a similar playbook from the RBNZ back in the 2019 easing cycle when it surprised markets with a larger-than-expected cut to get ahead of a global slowdown.
