The Reserve Bank of New Zealand is likely to reduce its official cash rate by 25 basis points to 3.50% on Wednesday. However, concerns about a global trade war could lead the bank to consider a larger cut of 50 basis points.
Prior to recent market declines, all 31 economists surveyed in a Reuters poll anticipated the 25 bps cut. Since August, the RBNZ has decreased rates by 175 bps to stimulate the economy and address rising unemployment.
Market Expectations
Market expectations now include up to 100 bps of additional cuts in 2025, spurred by current market instability. Former Governor Adrian Orr noted a low inflation environment, with Q4 inflation at 2.2%, which allows for more policy flexibility.
The New Zealand dollar, after rising 5.3% this year, has been affected by a global risk selloff following a recent tariff announcement. Although a 25 bps cut is expected, a larger reduction may support the NZD, especially as the currency approaches COVID-era lows before the rate decision.
The commentary in focus outlines the Reserve Bank of New Zealand’s strategy as it leans towards reducing borrowing costs further. There is strong consensus for a 25 basis point cut in the official cash rate, which would place it at 3.50%. Still, heightened global tension—notably linked to trade barriers—opens the door to a more drastic move of a half-point reduction.
What this means in practical terms is straightforward: the central bank is reacting to both internal and external pressures. Economic momentum within the country shows strain, partly due to rising unemployment. Since rate reductions began back in August, they’ve now shaved off 1.75 percentage points, which is considerable. The thinking is that cheaper borrowing could encourage spending and keep demand intact.
Before recent global equity pullbacks, every economist polled by Reuters had leaned towards the smaller 25-point cut. Now, sentiment is shifting. The abrupt drop in asset prices, tied to fears over trade protectionism, has many pricing in as much as a 100 basis point fall in rates next year. That sort of positioning suggests traders are preparing for an extended phase of easier policy.
Inflation and Currency Dynamics
Inflation remains subdued, and that’s an enabler. With the consumer price index at 2.2% for the fourth quarter, there’s less urgency to counter overheating. It grants room for decision-makers to lean on expansionary settings. Orr had previously spoken to that flexibility, and current metrics still give cover for further loosening.
The currency has been another focal point. The NZD had strengthened by more than 5% earlier this year, a rally that placed it above many of its peers. However, when global markets turned and risk aversion spiked—most recently triggered by new tariffs—the New Zealand dollar struggled. It moved sharply lower, nearing levels last seen during the early 2020 downturn. If the rate cut ends up being deeper than expected, there’s a chance the currency steadies or even bounces, depending on how markets interpret the bank’s confidence in pre-emptive action.
In short, there’s a short window where pricing is unusually fluid. We see movement not just in yield curves but also options premia, suggesting funds are positioning for either an aggressive move or a cautious hold that still leaves soft bias. Traders should weigh that sentiment against macro indicators abroad—particularly commodities and Asian demand signals—and not rely solely on domestic policy statements.
Recent longer-dated swap trades indicate that some are betting on more easing than is presently discussed in mainstream commentary. That positioning should not be ignored—it reflects calculated risk-taking, not misplaced optimism.
