How NZ and Australia compare on interest rates and inflation

Friday, 29 November 2024

New Zealand’s Official Cash Rate dropped from 4.75% to 4.25% on Wednesday.

Banks immediately dropped interest rates following the announcement.

But across the ditch, Australia is yet to experience any rate cuts.

Finance Minister Nicola Willis said in Wednesday’s post-OCR press conference that “if you thought inflation and interest rates come down on their own, just look over the ditch”.

So how does New Zealand and Australia compare?

New Zealand’s OCR dropped 50bp from 4.75% to 4.25% on Wednesday, the third consecutive drop since August, causing a flurry of banks to lower interest rates.

Our inflation rate currently sits a 2.2%, which puts annual inflation within the Reserve Bank’s target band of 1 to 3% for the first time since March 2021.

Australia’s inflation rate is currently at its lowest level since 2021, at 2.1% in the year to October, which was below market expectations. Meanwhile, Australia’s Official Cash Rate was at 4.35%, its highest level in a decade.

Economists across the ditch were predicting the Reserve Bank of Australia (RBA) would not cut the rate until about May next year.

But BNZ chief economist Mike Jones said comparing the NZ and Australian economies at the moment is not all that pleasant if you are a Kiwi.

“While NZ has experienced a two year long ‘rolling recession’, Australia’s economy has remained relatively more resilient with GDP still expanding. On a per capita basis, NZ’s economy is about the same size as it was pre-Covid while Australia’s is 2.5% larger.”

New Zealand’s unemployment rate was higher than Australia’s sitting at 4.8% and 4.1% respectively, New Zealand’s retail spending has been weaker and our housing market has been softer.

“The list goes on,” Jones said.

Some of this reflected why interest rates in Australia were not raised as high as they were in NZ.

“The Reserve Bank of Australia’s cash rate remains at the peak of 4.35% while the RBNZ lifted the cash rate to a 5.50% peak. But it's certainly not all about interest rates. ”

A good chunk of Australia’s comparative economic strength was sourced from more favourable external trade conditions with prices for Australia’s key goods exports such as iron ore, coal, and LNG, have held up better than NZ equivalents such as dairy, meat, and forestry, Jones said.

Infometrics chief forecaster Gareth Kiernan said Australia had generally been behind New Zealand in the inflation and interest rate cycle over the last two to three years.

“The RBA didn’t start lifting interest rates until May 2022, compared to our Reserve Bank’s first hike in October 2021.

Meanwhile, New Zealand’s inflation peaked in June 2022 at 7.3%, while Australia’s did not peak until December 2022 at 7.8%.

“The RBA has also been a bit more relaxed about inflation, which has been reflected in the timing and extent of their interest rate moves. That approach has meant that inflation has ended up being a bit stronger and more persistent across the Tasman as a result.

“Ultimately, it has meant that Australia has yet to begin its rate cut cycle, so they are still running behind NZ.”