Insights 
VT 
The Reserve Bank of New Zealand is expected to cut interest rates by 25 basis points on Wednesday. The central bank previously reduced rates to 3% in August, but a dovish stance suggests additional cuts may follow.
Recent data from New Zealand shows weaker GDP growth in the second quarter, decreasing by 0.9%. This downturn has widened the output gap, with growth remaining below the prior year’s level. Inflation indicators also show cooling, despite an elevated annual rate.
Interest Rate Forecast
The key interest rate is anticipated to fall to 2.75%, a move largely expected by markets and analysts, as per a Bloomberg survey. This rate change is unlikely to impact the currency significantly. Christian Hawkesby will chair his final meeting in November, with Anna Breman succeeding him as governor on December 1.
The Reserve Bank of New Zealand is expected to cut its key interest rate by 25 basis points to 2.75% tomorrow, which comes as no surprise to us. This move is a response to weak economic data, including the 0.9% contraction in GDP we saw in the second quarter and the recent Q3 inflation report showing a cool-down to 4.1%. Since the market has fully anticipated this cut, we do not expect a significant reaction in the New Zealand dollar on the decision alone.
For us, the focus should be on the risk of a surprise, which creates opportunities in short-term options. Implied volatility seems low given the small but real chance that the bank delivers a more aggressive 50 basis point cut or unexpectedly holds rates steady. A strategy that profits from a larger-than-expected move, regardless of direction, could be useful to position for the RBNZ’s post-meeting statement.
Potential Future Rate Cuts
We believe the bank will signal that more rate cuts are likely before the year is over. This view is supported by softening global conditions, especially the persistent manufacturing slowdown we have been tracking in China, New Zealand’s primary export market. Looking back to the 2019 easing cycle, we remember that the RBNZ’s forward guidance had a more sustained impact on the currency than the actual rate cuts.
The widening interest rate differential between New Zealand and the United States will likely continue to put downward pressure on the kiwi. With the US Federal Reserve holding its policy rate firm around 4.5%, the appeal of holding US dollars over New Zealand dollars is growing. However, any guidance about policy in 2026 should be treated with caution, as the new governor taking charge on December 1st may shift the bank’s future stance.
