Markets are almost fully pricing in a 25bp rate cut, which would take the RBNZ’s Official Cash Rate down to 3.00%. OIS pricing is currently sitting around a 92% probability for a cut.
The RBNZ has been preparing the ground for more easing for a while now, so the cut shouldn’t come as a surprise to anyone. This means all the attention will fall on the forward guidance and what the bank has to say about rates going forward.
Looking at the bank’s May forecasts, they estimated the OCR at around 2.9% towards the end of the year, which implies two more cuts (including the one from this week).
However, their annual CPI projections are in focus for today’s meeting. In May, they saw annual CPI dropping to 2.4% by year-end, and moving to 1.9% early 2026.
Interestingly, recent timelier inflation gauges have been putting upside pressure on inflation expectations, with things like food prices hitting their highest since December 2023. This has seen some forecasting inflation closer to 3.0% by year-end or early next year, and that would pose a problem for the RBNZ.
With markets currently pricing in close to 40 basis points of easing by year-end, the simplest trigger for volatility at today’s meeting would be if the bank cuts rates, but lifts its OCR projections to show no more cuts.
Going through a lot of bank reports, it seems that there are quite a few participants who expect the OCR to be downgraded to make room for more cuts. That means, even an unchanged OCR could be seen as a marginally hawkish outcome.
Personally, my trigger for a possible opportunity would be a cut and a clear message that they are done cutting. The way I’ll look to express that would most likely be the AUDNZD pair.
With the RBA kickstarting their cutting cycle, and with the RBNZ about to wrap up, that opens the way for some policy divergence downside in the pair. Things like growth and terms of trade differentials also suggest possible downside risks for the pair.
This is of course just my opinion and how I’m looking at the event, so never take this as advice and always make up your own mind and trade your own view.
This article was written by Arno V Venter at investinglive.com.