It's all happening on Thursday. Starting bright and early with the Fed, we expect to see a 25bps cut. And the cut is more than fully priced into the market. Weaker inflation out of the US last week supported the 28bps of cuts priced in following August’s soft payrolls number. The US producer price index surprised with some disinflation. The index fell by 0.1% over the month, and it was the first decline in 4 months. It must be noted that July’s print was a hefty 0.7% rise. Nonetheless, when paired with consumer inflation, which was broadly as expected, a Fed rate cut this week seems certain. More than the decision itself, it will be the revised forecasts and tone from the Fed that will drive markets. Their forecasts back in June signalled the Fed funds rate would be between 3.75-and 4% by end of year, implying one more cut after Thursday. Markets will be watching closely to see whether that outlook shifts toward a more dovish stance, potentially signalling additional rate cuts before year-end. The labour market has weakened after all.

In contrast, later in the day, the Bank of England is expected to keep rates unchanged. Inflation in the UK remains above the BoE’s target, at 3.8%.

Here at home, Stats NZ will deliver old and updated data on the Kiwi economy, telling us what we already know… we’re struggling to get out of this recession. The GDP report will likely show that economic activity contracted again in the June quarter. By our calculations, activity fell 0.3% –in line with the RBNZ’s forecast. (See our full preview).

What’s particularly frustrating is that the decline comes after a period where the economy seemed to be turning a corner. Over the warmer summer months, activity lifted by 0.5% in the December 2024 quarter, and a robust 0.8% over the March 2025 quarter. But now that strength has faded. On an annual basis, activity has been flat, meaning the economy is no larger or smaller than it was a year ago. We haven’t climbed out of the hole. In effect, activity has simply stabilised despite the significant rate cuts we’ve seen to date. Our recovery is dragging on and it’s a frustration for households and businesses across the country.

None of this comes as much of a surprise. Timely indicators had long pointed to a slowdown. The strength in manufacturing seen earlier in the year has quickly reversed, with the manufacturing PMI slipping back into contraction in both May and June. Meanwhile, the services PSI, which were already in contraction, fell into deeper negative territory. At the same time, reported activity in NZIER’s QSBO survey was weak. And the underperformance of the housing market has also weighed on activity… both directly on the construction sector and indirectly across other sectors through an absence of the wealth effect.

Heightened uncertainty from tariff and trade policy announcements over the quarter undoubtedly played a part too. So far, our export performance is still strong. But the real drag has come through the hit to household and business confidence. Businesses have delayed investment, adopting a more cautious approach.

It's that stalling of the Kiwi economy that forced the RBNZ’s dovish pivot at their August MPS. They finally acknowledged the weakness and signalled a further 50bps of rate cuts to 2.5%. And that’s exactly what the economy needs. At 3% today, the cash rate remains at broadly neutral levels. A level which has not been enough to spur growth in the economy. A cash rate below 3%, however, puts stimulus on the table. In time, low interest rates should reignite economic activity. With that, the outlook is much brighter. Forward looking indicators for activity in the September quarter are pointing to a rebound in activity. And that trend should gain traction with the additional 50bps of easing signalled by the RBNZ.

Financial Markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In rates, the Kiwi curve flattens

“Lack of a domestic catalysts saw the Kiwi curve flatten in sympathy with global yields. The long end, most susceptible to offshore moves, was dragged down 10bps over the week. The US 10 year dropped to around 4% with weak payrolls data seeing more easing priced in. US inflation data coming in line with expectations was another green light for more rate cuts from the Fed. The ECB in contrast left rates on hold maintaining a neutral policy bias.

This week in NZ we get GDP, though backward looking, will provide some hard data for exactly how lacklustre economic growth has been. Nevertheless, the RBNZ have been pretty clear they see OCR getting to 2.5% by the end of the year. Currently there is 40bps of cuts priced into October and November although a GDP print much below RBNZ’s -0.3% forecast could see this grind higher.

High frequency PMI data for August dropped back below 50 but did show improvement in new orders which corroborates the story of weakness here and now but an improved outlook for remainder of the year. Thursday will be a big day with Fed meeting and Australian unemployment to bookend our own GDP print. Matthew Crowder Balance Sheet Manager – Treasury.

In currencies, potential moves come with the Fed’s FOMC

The Federal Reserve’s FOMC meeting is the key event this week, with potential to drive significant market moves. Fed Funds futures currently price in a 26bp cut, with some overshoot suggesting a 50bp move—though we view this as unlikely. Fed officials remain cautious about easing policy amid lingering uncertainty around the inflationary effects of tariffs. That said, last week’s benign PPI and CPI prints suggest limited tariff impact so far.

Our base case is a 25bp cut, with the tone of the Fed’s messaging being pivotal. A hawkish cut—signalling reluctance to ease further—could push expectations for additional cuts out or remove them entirely. This could lead to notable USD volatility, with implications for the NZD.

Domestically, Q2 GDP is due this week and is expected to show continued contraction. Our forecast is -0.3% q/q, in line with the RBNZ’s view, though some expect a deeper decline of -0.4%. A larger downside surprise may weigh on the NZD, but given its lagging nature and proximity to the Fed decision, the impact may be muted unless the print deviates significantly from expectations. We expect NZD to remain within its recent 0.5850–0.6000 range.

NZDAUD continues to hover near the key 0.8950 level, lacking momentum for a decisive break lower. The August RBNZ dovish pivot drove the initial move, but domestic catalysts remain limited. Rate differentials could re-emerge as a driver, particularly if expectations shift toward a lower RBNZ terminal rate of 2.25%—though we’re not there yet. Our base case remains a 2.50% terminal rate, with downside risks outweighing the likelihood of a hold at 3.00%. A hawkish surprise from the RBA could be the catalyst for a lower cross. Mieneke Perniskie – Senior Dealer, Financial Markets.

Weekly Calendar

Central Banks take the stage this week.

• Starting with the US Fed on Thursday morning, a 25bps cut is expected in response to a weakening labour market and suggestive downside pressure on prices. More than the decision itself though, it will be the revised set of forecasts and accompanying tone from the Fed that will drive markets. See our weekly for more.
• Overnight on Thursday the BoE in contrast are expected to keep rates unchanged with inflation stuck above their target range at 3.8%. UK CPI data on Wednesday is expected to confirm stubborn price pressures remain with no budge to the annual headline rate. And overall given the BoE recently flagged concerns around sticky inflation, the BoE are expected to retain their messaging around the timing of further rate cuts remaining uncertain.
• Similarly, the BoJ on Friday are expected to leave rates unchanged with their CPI release that same day expected to show headline inflation moderate from 3.1%% to 2.8%. Along with core easing to 3.1% from 3.4%. Food prices still having a notable impact.
• Domestically, the main data release is Q2’s GDP figures. See our weekly for our full preview. But ultimately consensus is unanimously for a stalling of the Kiwi economy over the June quarter. Other domestic data to watch is the Stats NZ’s selected price index on Tuesday and trade data out Friday.
• Close to home, we’ll also see Australia’s employment data for August out on Thursday. Jobs growth is expected to have increased by 21k, less than the 24.5k gain last month but still a moderate expansion enough to keep unemployment rate unchanged at 4.2%

See our Weekly Calendar for more.