A trans-Tasman tale of two Reserve Banks

Thursday, 1 August 2024

Luke Malpass is The Post’s political, business and economics editor

OPINION: On Wednesday, Australia’s inflation data was release. At 3.8% it was in line with market expectations - but it had risen from 3.6% in the March quarter.

However, the underlying measure of inflation preferred by the Reserve Bank of Australia - the trimmed mean - fell slightly from 4% last quarter to 3.9%.

The Albanese Government would have breathed a sigh of relief. An election is due before September of next year and any rate rises could have very real political implications for the timing of an electionas polls show Australian voters marking their Government hard on their handling of cost of living.

Housing and food and alcoholic beverages were the big drivers of cost pressure across the ditch - in common with New Zealand, high rents were a part of the mix. House purchases by owner-occupiers have also contributed.

Compared to the Reserve Bank of New Zealand, the RBA and its newish governor Michele Bullock has kept its inflation rate target on the low side. The current official cash rate in Australia is 4.35% compared to New Zealand’s 5.5%.

Essentially this is reflective of the fact that the two central banks have taken a slightly different approach to driving inflation downwards.

The RBA tried to keep a lid on interest rate rises in the hope that inflation would smooth out and that while it might take longer to get within the target bans, it wouldn’t require the hikes that New Zealand has experienced.

“Returning inflation to target within a reasonable timeframe remains the Board’s highest priority. This is consistent with the RBA’s mandate for price stability and full employment,” the RBA’s monetary policy committee said in its last decision on June 18. It also noted that the outlook was very uncertain.

In New Zealand, full employment has been stripped out of the Reserve Bank’s mandate, although most economists tend to think that will only make small differences at the margin of the bank’s thinking, if at all.

However, the fact that inflation has basically remained flat will be of concern to the Australian central bank.

One thing is for sure, no one in Australia is talking about interest rate cuts. Whereas in New Zealand the speculation on what the bank will do - and proffered opinions on what it should do - have begun in earnest.

That’s because the Reserve Bank of New Zealand has been relentless and aggressive in trying to get inflation back into band. In common with Australia, it has been expected that the last bit will be sticky to get under control.

Given the deteriorating economic circumstances and based on the current trajectory it would be a surprise if New Zealand next inflation reading in October did not have inflation back or extremely close to the 1% to 3% target band. But external events and supply chain shocks can always alter the track of tradables inflation.

Nevertheless, rewind the clock to a year ago and there were plenty of claims about how Australian inflation was lower than in New Zealand and that this was a failing of monetary policy, or fiscal policy or both.

Now the shoe is on the other foot.

New Zealand has gone harder - both in the sense of hiking rates and having a Government that has pared back spending - although the effect of the modest tax cuts remain to be seen - but seem very unlikely to meaningfully contribute to the inflation number.

Australia has taken a different approach and the jury is out about exactly how its strategy will play out.