Insights 
VT 
New Zealand’s inflation expectations have risen for both the 12-month and two-year forecasts for the second quarter of 2025. The Reserve Bank of New Zealand’s survey indicates two-year inflation expectations increased to 2.29%, up from 2.06% in the previous quarter.
One-year inflation expectations rose to 2.41% from 2.15%. This has impacted the NZD/USD, edging closer to 0.5900 with a rise of 0.35% on the day.
Understanding Inflation
Inflation measures the increase in prices, typically shown as a percentage change. Core inflation, excluding volatile items like food and fuel, is the focus of economists and is the level central banks aim to control, generally around 2%.
The Consumer Price Index (CPI) tracks the price changes of goods and services over time. Core CPI guides central banks and influences interest rate decisions, affecting currency strength. High interest rates usually strengthen a currency in response to higher inflation.
Gold is traditionally a safe investment during periods of inflation but is less attractive when interest rates rise. Lower inflation, conversely, decreases interest rates, making gold a more appealing alternative investment. Various factors, including interest rates, influence the relationship between currency value and inflation levels.
The Reserve Bank of New Zealand (RBNZ) released its latest data showing a marked uptick in inflation expectations over both short and medium-term horizons. Specifically, market participants now anticipate consumer prices to rise more substantially over the next year and two years than previously expected. This upward adjustment in forecasts reflects heightened concerns that inflationary pressures remain more persistent than assumed earlier and are likely to extend beyond immediate conditions.
What we’re seeing in the one-year expectation, now projected at 2.41% from a prior 2.15%, suggests a firmer belief that price pressures are not fading as quickly. The two-year expectation recorded a similar move, nudging up to 2.29% from 2.06%. These figures remain above the midpoint of most central bank targets, including RBNZ’s—providing the Monetary Policy Committee grounds to reconsider the timing or extent of any easing measures thought to be on the horizon.
Market Reaction and Implications
Unsurprisingly, the NZD has responded in kind. Movement in the NZD/USD pair toward 0.5900 appears to reflect repricing in the wake of inflation data that pushes back against rate cut assumptions. With a gain of 0.35% in the session, there is evidence that near-term rate expectations are being adjusted, with markets factoring in a higher-for-longer policy stance.
Conceptually, inflation refers to the general rise in price levels, and central banks, including the RBNZ, scrutinise a more stable measure known as core inflation. By removing volatile elements like food and fuel, core inflation provides a cleaner measure of underlying trends that monetary policymakers use to base their official cash rate decisions on.
The role of the Consumer Price Index (CPI), and specifically its core variant, is to act as a benchmark for how pricing power develops across the economy. A higher CPI, and particularly a stubborn core reading, places pressure on a central bank to wield tighter monetary conditions. Higher interest rates are typically employed to prevent inflation spirals, which in turn can support a country’s currency because of improved returns on capital investments relocating towards that economy.
In the current scenario, persistent inflationary expectation lifts the likelihood that monetary settings in New Zealand remain relatively restrictive. That, in turn, diminishes the appeal of alternatives like gold, which thrives when inflation rises faster than rates. At moments when policy tightening still has room to run, gold tends to lose ground as opportunity cost becomes more distinct.
That said, the linkage between inflation data, interest rate movements, and currency reaction operates with a relatively steady rhythm. Given the RBNZ’s dual objectives of price stability and sustainable employment, any material upward shift in wage expectations or consumer price trajectories could delay policy loosening. Further up the chain, that limits downward mobility for the NZD in the near term and increases implied volatility for related derivatives.
We should be conscious of how these revised inflation forecasts might seep into behavioural shifts across other inflation-linked assets. Interest rate swaps, bond futures, and currency forwards may now exhibit tighter pricing around current policy forecasts, especially if other central banks begin to diverge in response to domestic inflation trajectories. The key is for participants to stay rigorous in positioning, hedging where necessary, and re-evaluating carry trades that rest on a weakening NZD given the directional bias now implied by the data.
Forward curves could begin to reflect this recalibration. Market sentiment will be tested in subsequent economic readings, especially if inflation expectations continue climbing softly but steadily. For those aligned with rate sensitivity in multi-asset strategies, there is wisdom in re-running stress tests under scenarios that now seem more probable.
