SYDNEY: As Australia’s central bank contemplates whether its monetary policy is “sufficiently restrictive,” a glance across the Tasman Sea might prove instructive.
New Zealand’s reserve bank on Wednesday unexpectedly opened the door to interest rate cuts, with its tighter policy stance curbing demand across the economy and boosting confidence that inflation will return to target.
By contrast, traders see a real risk that the Reserve Bank of Australia (RBA) will raise rates at its next decision on Aug 6 as inflation is stickier than anticipated.
The two central banks plotted different courses during the post-pandemic inflation battle.
The RBA moved cautiously on the way up, taking its cash rate to 4.35% in November 2023 from 0.1% in 2022 for a total of 4.25 percentage points of hikes.
The Reserve Bank of New Zealand (RBNZ) moved sooner, faster, and hiked by 5.25 points.
While the consensus among economists is still that the RBA will hold rates at 4.35% this year, some believe a hike cannot be ruled out, especially if a second-quarter inflation report on July 31 surprises on the upside.
Australian households “will need to grapple with another interest rate hike,” said Josh Williamson, economist at Citigroup Inc in Sydney. “This could take the wind out of the consumer in the second half.”
One problem for the RBA is that inflation expectations in Australia haven’t remained as anchored as they have in New Zealand.
The minutes of the RBA’s June board meeting last week showed policymakers are “closely monitoring” longer-term inflation expectations, saying a drift higher would require “significantly higher interest rates.”
The RBNZ’s policy tightening has taken the wind out of New Zealand’s housing market, where prices declined for the third straight month in June after falling for most of last year.
Home-building costs in the country dropped for the first time in at least 12 years in the June quarter. — Bloomberg
