By Gareth Vaughan
The Reserve Bank of Australia's decision to lift its cash rate 25 basis points this week means it's now 160 basis points higher than the Reserve Bank of New Zealand's official cash rate highlighting differing levels of assertiveness between the two central banks, Imre Speizer, Head of New Zealand Strategy at Westpac, says.
The RBA's cash rate is now at 3.85% with the RBNZ's OCR at 2.25%. Speaking in a new episode of the Of Interest podcast, Speizer says it has been 13 or 14 years since there has been such a gap, with the two economies tending "to cycle together most of the time."
"It comes down to a different central bank approach. The RBA has deliberately maintained a fairly dampened approach to tackling either low inflation or high inflation. So when it has needed to hike or cut, it has done [so] in a very cautious and drawn out manner. And by doing so it hasn't had to flip around as much as the likes of some other countries," says Speizer.
"The central bank of New Zealand has been pretty much an activist in terms of tackling inflation. So when inflation was high in the most recent cycle it went fairly hard and hiked rates a lot to bring it back down again, and that then amongst other things did help to engineer a brief recession."
"It paid a cost to do so but it got inflation under control. Now we're basically coming out of that era and [economic] growth is starting to pick up. And so the Reserve Bank [of NZ] is now faced with the task of thinking; well at what point do we need to start thinking about pushing rates up to prevent inflation from running away?"
"I guess it just means the assertiveness of the relative central banks is probably explained [in] why we've ended up with such big differences between New Zealand interest rates and, say the Australian interest rate. In time that will rectify itself and will get back to something that looks a bit more normal, I.E. Kiwi rates a little bit higher than Aussie rates. But I think it's going to be some way down the track," Speizer says.
He says lots of people are asking how the cash rate differential between New Zealand and Australia might play out with mortgage rates.
"There shouldn’t be any direct impact if the cause of Australian rate rises is unique to Australia. But much of the time, there is a common global factor at play, so New Zealand rates do follow Australian and US term rates," Speizer says answering a follow-up question to the podcast interview.
"Also, if the strong Australian economy is seen as eventually benefitting New Zealand’s economy, New Zealand term rates could rationally follow Australian rates higher in dampened fashion."
In the podcast audio he also speaks about the direction of swap rates and what it means for mortgage rates, what the yield curve's suggesting at the moment, the outlook for NZ government bonds, the impact the volatility of US President Donald Trump's administration has on the US dollar and financial markets more broadly, incoming Federal Reserve Governor Kevin Warsh, the impact of US government shutdowns on economic data availability, geopolitics and more.
*You can find all episodes of the Of Interest podcast here.
37 Comments
The RBA have a dual mandate to also minimise unemployment while the RBNZ are mandated to keep inflation in a tight band even if that means killing the economy and creating significant unemployment.
Personally I prefer the Australian economy right now, a little inflation is better than recession IMO. NZ is a very risk averse country, then we wonder why our economy isn’t as good.
Case in point as we speak. The economy isn't even on any kind of sound growth trajectory and already there are calls to raise interest rates. Hopefully the RB deploys some common sense by looking through the current inflation fluctuations.
What would you do if you were the RBNZ and had their mandate? Personally I would have hiked the OCR, not lowered it. There seemed to be no reason to lower it if inflation was all they were considering.
I'd measure domestic inflation against current labour market conditions, consumer spending and business capex. Then make an informed decision, not just use the OCR to play ping pong within an abstract headline inflation band.
The RBNZ mandate to consider employment and inflation was changed to just focus on inflation as promised by the coalition government. Higher unemployment is the tool being used via monetary and fiscal policy to cool inflation. However, inflation is now heading above 3% as unemployment rises which suggests we need higher unemployment delivered by rising interest rates and further fiscal consolidation by the government. If the consequence is continued contraction I don't think it is accidental. Which is what we are going to get in 2026.
It’s fine to increase the OCR when inflation is raging out of control, but not so cool to make people unemployed to get it from 3.2% to 2% IMO. I would have a full employment secondary goal for the RBNZ if it was me, only applies when CPI is under reasonable control.
Interest rates are an indicator of economic strength and resilience - low interest rates are more likely in a weak and contracting economy like NZ's - higher or rising interest rates suggest a robust and growing economy like Australia's.
Australian business leaders are currently calling for the government to reduce spending by $50 billion a year in order increase unemployment and dampen wage inflation and worker options. NZ business leaders are much happier than Australian ones - the irony should not be lost. The economic environment we have in NZ is one that protects profits from wage growth and improves worker retention.
It may be worth noting the Oz gov is throwing the kitchen sink at RE values through assistance and migration....our lot havnt yet resorted to that (though the migration may not be for lack of trying)....yet.
Australia has always relied on and utilized population growth through immigration to maintain a stable and growing economy. It has also leaned heavily on fiscal tools to support that growth and during economic downturns. It has avoided the erratic and frankly chaotic economic polices that NZ adopts.
Do you wish to seriously suggest that Australia's housing and migration policies are orderly and stable?
At the macroeconomic level Australia has maintained a stable and growing economy for decades - after the 2008 GFC they were the only country not to experience recession - the government created and distributed money like a drunk Keynesian.
You're right though - the outcomes in the big cities, especially, are not always ideal and policies vary from state to state.
They probably should have created a new big city to take the pressure off the others. Maybe the likes of Newcastle or something
"You're right though - the outcomes in the big cities, especially, are not always ideal and policies vary from state to state."
That may be the understatement of the decade. Australia have all the same problems we do excepting the persistent negative trade balance even with their 13% super contributions and mining sector. Funnily enough they have a population approaching 30 million which according to some should solve all problems...go figure.
Every country has problems. The Aussies have very high median wealth, high incomes, low unemployment, good free healthcare, very good superannuation, low government debt. Very few countries can say the same.
Talk to some who live there....high level stats tell you nothing, as you should understand from experience. Their healthcare is marginally better than our own (relatives have told me some aspects here are better, and that is saying nothing good), they have a 25% of superannuants living in poverty, housing costs average of over 8 to income and up to 13 in Sydney. Unemployment is as here, precarious work , with high youth unemployment and immigrants working outside the measure.
Everyone likes to whinge about their first world problems. Like the yanks claiming their median family is struggling on $175k NZ.
When my grandparents grew up they couldn’t afford toilet paper, healthcare was almost non existent. Massive progress in just 3 generations, you’d think we’d be happy…
Healthcare is only going to get worse with an ageing population. Someone is going to have to miss out I reckon. Not sure if it will be an age cutoff, or the need for private insurance to get decent care, or massive wait lists. I doubt we could possibly afford everyone to get the level of care that was once offered with an ageing population. In saying that, technology obviously helps a lot, so overall the health system will probably be more effective than now, it just won’t feel like it.
“stats tell you nothing, as you should understand from experience.”
I don’t agree. People seem to have this weird fantasy that the past was amazing and the present sucks, maybe rose tinted glasses were in fashion back then.
Unemployment and youth unemployment for example have always been problems, often significantly worse than now.
You are probably more likely to be fixed in hospital now than ever before (mainly thanks to technology and medicines).
Housing is pretty much as affordable due to low interest rates and high wages.
Poverty is measured relatively so it’s technically impossible to fix, but anyone who tries in NZ or Aus can afford the basics of life, that hasn’t always been the case.
You need a strong demand for labor to attract immigrants and that requires a strong and growing economy. NZ currently has outward migration of 70K per year for the past 2 years. The country and the economy are literally shrinking - 30K jobs have gone since the coalition were elected. It's kind of remarkable - non of our economic peers have experienced anything like it.
The Nats love to say that Labour caused the cost of living crisis, even though that happened to almost every country. But what didn’t happen to every country is the 2 plus years of recession that have happened under the coalition’s watch.
National lied to the nation, it sowed the belief that it just needed to cut a little waste from Labour's spending to right the ship, however we are still borrowing at a furious pace. Perhaps the cuts required to move to surplus are so great they will kill the economy completely.
Perhaps the electorate cannot handle the truth. Taxes need to go up, waste must be cut, but more importantly services must also be cut to move to surplus.
Everyone has borrowed big and bet on property, and its still unwinding. It will be for ages, and like China the Real Estate debt payback is going to be a huge drag on discretionary consumer spending in NZ.
There is also the general rule that a country grows in proportion to the energy it consumes. We are out of gas and power is crazy expensive. NZ cannot IMHO grow until we solve future energy production.
NZ cannot rely on further private debt to grow, and the Government is already borrowing heavily to fund the gap, we need structural reform to break out of this. IMHO Capital gains tax, higher corporate tax will be necessary, as well as possibly tax deductible super contributions. THERE WILL be wealth destruction hence no one wants this to occur.
We just need some growth, and hopefully it will come this year. Then tax bracket creep will increase government revenue. And as you said debt payback is a massive issue, but interest rates are now 2.5% lower than the peak. Personally I feel they may need to go lower still.
The problem is that after giving tax cuts, the revenue growth they need is much much more than it would have been.
You say we just need some growth, without addressing the energy and private debt levels he mentioned. What you allude to is that lowering the cost of credit means we can just borrow our way to growth due to lower interest rates, despite the energy limitations, which doesn't compute.
Perhaps the electorate cannot handle the truth.
No one wants less than they already have.
You're right, we need more taxes and less spending.
The Keynesians will tell you we can print our way to prosperity. But they all forget that Keynes didn't advocate endless permanent deficit spending - only for it to smooth out economic down periods. He insisted that surplus' should be sought and the balance be put aside.
"You're right, we need more taxes and less spending."
We do and we dont....it depends where it falls. We need money to circulate more (velocity) and we need to remove the ability to increase prices by those with excess ability to protect their assets by taxation...not increasing taxation on the wider public or productive endeavour, as that is not where the price increases are emanating from....all consistent with Keynes.
Distribution is the key.....AKA reducing inequality.
How do you tax the rich and have doctors / engineers / etc choosing NZ over somewhere else? I suspect trying to redistribute would actually create more problems.
By taxing the non productive activity.....doctors engineers etc are productive in their capacity as doctors engineers etc....not as rent seekers. Tax the rent seeking....rent seeking is non productive and unfortunately we have developed a system that rewards/encourages rent seeking rather that productive activity....and worse we have outsourced that productive activity to offshore suppliers that further reduces our ability to control the velocity and distribution of our currency.
I don’t have a problem with that. Something along the lines or what Labour did by removing interest deduction? Or a capital gains tax? Or a wealth tax (but that would hurt doctors and engineers)?
Removing interest deduction was a good move imo,( reversed by the current lot, i note)...but it was a small step when a leap was needed.
We need to undo 4 decades of loss of capacity, capability and control and PDQ before we totally lose the ability to do so.
The best move is to allow more housing. You can’t call it speculative when there is an unlimited potential supply of housing, and we are heading that way. Giving the planners at the council unlimited use of the declined stamp was the real problem.
No, the real problem was making it more lucrative to speculate on capital gains than it was to actually do something productive.
Speculation was only a small part of the problem. Most of the problem was basic supply and demand; a lack of supply caused by the RMA, and a large demand caused by immigration. Without those two, speculation wouldn’t have existed.
While I would personally prefer a capital gains tax for fairness reasons, I doubt it would have made much difference.
There are/were many areas to attribute the speculation to, however none of it would have occurred without the facilitation of both the Government and the banks...who control the levers of supply and demand. In other words it was deliberate and the reversal will also need to be deliberate.
Most of the problem was basic supply and demand
It is a contributor, but most of the problem is the level of financial advantage afforded by property since the late 1908's that incentivised such rampant investment in this area. Back then it was relatively affordable to leverage and purchase additional property from the late 1980's, and was financially advantageous so much so that one could leverage their own house, purchase a rental that would pay itself off in 10 years, then be all profit. Ring fencing was not in place so losses could be offset against personal income, making it even more financially advantageous. One could use each property as an ATM and purchase more and more property, with the further advantage again of capital gain outpacing inflation for the better part of 30 years.
They haven't done a lot in an orderly fashion to turn the ship around, but just as If we went to dinner and I maxed your credit card to pay for it, then ditched, he who is left with the bill has a hard time getting things back to equilibrium.
Maybe best video on NZ issues seen recently - Thanks to the guy who sent it to me, need a beer soon
What Happens When A Country Runs Out of Young People? (New Zealand’s Warning)
forget the title its a great watch
Yes very interesting! It’s funny how we laugh at US politics, but really ours might be more laughable.
In essence Luxon is on the right track, we need more investment in NZ. Unfortunately belt tightening is probably not the way to get it. He needed to take a gamble, get the economy revving, keep the young people here, get high quality immigrants and foreign investment. Austerity wasn’t the answer.
Actually that got me thinking, what were NZs worst political decisions ever made? In most countries it would be wars. While I know interest commentators hate neo-liberalism, I reckon the worst policies in NZ have actually been the opposite; the socialist NZ super scheme that Muldoon choose, and the protectionist RMA that prevents building houses. Had we stuck to personal responsibility (saving for your own retirement) and low regulation (being allowed to build what you want on your own land), I suspect NZ would be a much more prosperous country.
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