The NZIER Monetary Policy Shadow Board advises the Reserve Bank of New Zealand (RBNZ) to reduce the Official Cash Rate (OCR) by 25 basis points to 3.50 per cent during the April Monetary Policy Review. This recommendation coincides with expectations of action from the RBNZ amid global financial stress.
The RBNZ is noted for its proactive approaches compared to other central banks, which often hesitate. In contrast, the Reserve Bank of Australia kept its cash rate at 4.10 per cent, while the Federal Reserve expressed intentions to await clearer economic signals.
Monetary Conditions and External Pressures
This recommendation reflects a broader expectation that monetary conditions need adjustment in response to mounting external pressures. Global instability, particularly from financial sectors abroad, is now influencing domestic outlooks. What we’re noticing is a softer tone from the NZIER Shadow Board, implying that further tightening might no longer be justified. Instead, the data seems to point towards economic slack building—something we would typically associate with a gentler policy stance.
From our perspective, the choice to advise a reduction, rather than simply holding steady, stems from early signs of slowing consumption and cooling investment activity. Forward-looking indicators, such as confidence measures and commodity prices, have also drifted lower. These shifts don’t just hint at declining momentum—they carry implications for pricing power, sector margins, and, importantly, inflation expectations.
Hawkesby’s team has, in the past, acted decisively when confronted with softer inflation outlooks. Now, with global credit conditions tightening and capital flows behaving oddly, it’s not surprising to see renewed attention on short-end yields. Cross-currency basis swaps are widening again. That’s not something we’ve seen persistently this year, and it raises the costs of hedged foreign funding—an issue particularly sensitive to leveraged plays.
Markets have now fully priced in a cut, which has already started to shape forward curves in the swap space. Treasury yields are gradually adjusting, with demand evident across the intermediate points of the curve—weaker inflation print expectations are clearly feeding that. Volumes have shifted, too. It’s not just the nominal shift in implied rates, but also how traders have started rolling positions to reflect revised expectations around terminal rates.
Risk Management in the Current Environment
For us, this month brings a firm moment to reassess delta and vega risk in short-rate products. Margin sensitivity to policy assumptions could spike again, particularly if offshore inflation surprises come through. Also, carry trades that were previously optimal may no longer be viable, now that long-end steepening appears to be stalling.
There’s also an underlying gap between domestic and foreign rate policy assumptions. While the US appears keen on a wait-and-see approach, this leaves local curves vulnerable to repricing if external central banks take smaller or slower action. Bailey’s recent remarks suggest a holding pattern abroad, which adds asymmetry to short-term risk here.
We’ve noticed a slight increase in volatility across two- to five-year maturities, largely driven by recalibration in options markets. Skews in payer swaptions aren’t extreme yet, but their flattening suggests that fewer are betting on sharply higher rates in the medium term. That’s worth taking a closer look at, especially considering how those instruments behave under low CPI surprise regimes.
With the committee leaning dovish and responding to the transmission lags in earlier decisions, some of us are watching closely for week-to-week rate expectations baked into index futures. In the absence of large shocks, these adjustments tend to be linear—but the current environment leaves room for outsized moves over brief windows. We’re seeing that especially in calendar spreads where term premium reasserts itself.
Ultimately, position management must reflect this pivot. Exposure that previously hinged on persistent tightening is now misaligned with both central projections and market consensus. Allocation should be lightened across aggressive steepeners for now, with more attention on binary setups tied to data prints in the next fortnight.
