BONDS: NZGBS: Bear-Flattener, RBNZ Repo Of Sep-25 Linker

The RBA decision is February 18 including updated staff forecasts and the AUD OIS market has around an 80% chance of a 25bp rate cut and as MNI discussed last week, the RBA rarely doesn’t ease if the market expects it to. In terms of the data, Q4 inflation was lower than the RBA’s November forecasts but they will be key as to whether it has gained more “confidence that inflation is moving sustainably towards target” and here the core services outcome may be a problem.

• The RBA noted in the December minutes that “underlying inflation was still too high, underpinned by persistently high services price inflation”. Core services rose 1.1% q/q and 4.2% y/y in Q4 following 1.3% & 4.1%, signalling that they remain sticky as has been the case in other countries. December monthly services rose 3.7% y/y but down from 4.2%.
• Thus the domestically-driven services will be an important input into the February RBA decision and may make the tone around any easing sound very cautious.
• The S&P Global services PMI report for January is consistent with ongoing stickiness concerns. It noted that input costs increased sharply due to wages, AUD and higher supplier prices and as a result selling prices rose at their fastest in 6 months. 

Australia services CPI y/y%

• January NAB business price/cost components were more neutral than the PMI but did signal a stalling in their moderation.
• Melbourne Institute inflation expectations and gauge for January are consistent with inflation returning to target.
• Our PCA CPI estimate, removes volatile components, eased 0.1pp to 2.7% in Q4, approaching the band mid-point.
• The AUD TWI is up 0.3% m/m in February to be down 1.6% y/y and with Q4 import prices rising only 0.2% q/q and still down 1.9% y/y, the currency is unlikely to be a concern. It is worth noting though that a 17.7% y/y drop in imported petrol prices has kept imported inflation subdued.

Australia monthly trimmed mean inflation y/y%

RBA-dated OIS pricing is 1–5bps firmer across meetings today, led by late 2025 contracts. 

• More notably, OIS pricing is now mixed compared to pre-Q4 CPI levels on 24 January, with the Aug-25 meeting firming by 10bps over the past week.
• A 25bp rate cut in April remains fully priced (119%), while the probability of a February cut stands at 84% (based on an effective cash rate of 4.34%).
• Historically, it would be highly unusual for the RBA to diverge from market expectations, especially given its lack of official or unofficial efforts to push back against pricing—something it has actively done in the past.

Figure 1: RBA-Dated OIS – Today Vs. Pre-Q4 CPI

Source: MNI – Market News / Bloomberg