Insights 
VT 
Markets are largely anticipating a 25 basis point rate cut, potentially bringing the Reserve Bank of New Zealand’s Official Cash Rate to 3.00%. Current OIS pricing indicates a 92% chance of such a reduction.
The RBNZ has been signalling the possibility of easing for some time, making this expected cut unsurprising. Focus now shifts to the bank’s forward guidance on future rate decisions.
The May Projection And Its Implications
In May, the RBNZ projected the OCR at approximately 2.9% by year-end, suggesting two more cuts, including this week’s. Their forecast for the annual CPI was a decrease to 2.4% by year-end, moving to 1.9% in early 2026.
Recent inflation indicators, such as escalating food prices, are pressuring expectations upwards. Some analysts now forecast the inflation rate nearing 3.0% by year-end or early next year, complicating the RBNZ’s strategy.
Markets are pricing almost 40 basis points of rate cuts by the end of the year. Volatility could arise if the RBNZ reduces rates but suggests no further cuts. Some market participants anticipate the OCR being adjusted downward to allow for additional reductions, making an unchanged OCR seem relatively hawkish.
A rate cut of 25 basis points from the Reserve Bank of New Zealand is almost a certainty today, on August 20, 2025. We can see in the derivatives market that the probability of this cut is priced at over 90%, which would bring the Official Cash Rate to 3.00%. The main event, however, will be the bank’s guidance on what it plans to do next.
Recent Data And Inflation Dynamics
The RBNZ’s own forecasts from May 2025 pointed towards another cut later this year, but recent data is telling a different story. The latest official data from July showed Q2 annual CPI was still at 2.9%, running much hotter than the bank’s projection of 2.4% by year-end. This stubborn inflation makes further rate cuts a much harder decision for the bank.
This inflation pressure is visible in more recent numbers, as the food price index we saw released for July showed a 4.5% annual increase, its highest level since late 2023. If inflation is now being forecast closer to 3.0% for the end of the year, the case for more easing weakens considerably. This sets up a potential conflict between market expectations and the economic reality the RBNZ is facing.
The simplest trigger for volatility would be if the bank delivers the expected cut but then signals it is done, lifting its rate projections to show no more easing this year. Many traders seem to be positioned for a more dovish message, expecting the bank to make room for more cuts. An unchanged rate path, therefore, would likely be seen as a hawkish surprise.
A key opportunity for derivative traders could be to position for policy divergence between New Zealand and Australia. The Reserve Bank of Australia just delivered its first 25 basis point cut earlier this month, taking its cash rate to 4.10%. If the RBNZ pauses today while the RBA continues to ease, the New Zealand dollar should strengthen against the Australian dollar.
This view is supported by recent fundamental data, where we saw New Zealand’s Q2 GDP show a modest rebound while Australia’s growth slowed. We’ve also seen prices for New Zealand’s key dairy exports firm up while the price for Australian iron ore has softened. These trends in growth and trade add weight to a potential fall in the AUD/NZD currency pair.
Looking back from our perspective in 2025, we remember the RBNZ led the world in aggressively hiking rates through 2022 and 2023 to get inflation under control. It now seems possible they could be one of the first major central banks to finish their easing cycle. This potential end to cuts stands in stark contrast to neighbors who are just beginning to lower rates.
