Reserve Bank of New Zealand cuts interest rates while RBA stands still

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Australians are used to New Zealanders being ahead of us on the rugby field. But it may come as a surprise that our smaller neighbour has also been leading us in the financial field.

Today, the Reserve Bank of New Zealand (RBNZ) elected to make the interest rate cut that Australia’s central bank passed on yesterday.

The RBNZ has decided to lower its official cash rate by 25 basis points, taking it down to the same level as Australia’s at 1.5 per cent.

While New Zealand’s cash rate is now at the same level as Australia’s, both countries had kept rates on hold for a similarly long time — the last cut was November 2016 across the ditch and August 2016 here.

Market forecasts of a rate cut were very similar to Australia, with 14 of 20 economists surveyed by Bloomberg expecting a cut, but money markets only pricing in a 40 per cent chance of a downward move.

Yet the RBNZ took the plunge with a rate cut, while the RBA stood pat for at least another month, and probably a couple more.

And it’s not because of vast differences in the countries’ recent economic performance — on the contrary, you would struggle to find two more similar sets of data.

Like Australia, New Zealand’s annual growth rate has fallen sharply from more than 3 per cent early last year to 2.3 per cent by the end of December 2018.

The big squeeze

The big squeeze

Aussie households are being squeezed by weak wages growth, shrinking savings and tighter credit.

Also like Australia, New Zealand’s monetary policy gurus were confronted with a surprising weakness in consumer price increases over the first three months of the year, with inflation at an annual rate of 1.5 per cent.

That is pretty similar to Australia’s core inflation rate, which Australia’s Reserve Bank said was 1.6 per cent (although on another measure it is as low as 1.2 per cent).

Moreover, the RBNZ’s inflation target is more tolerant of low price rises than the RBA’s, being set at 1-3 per cent, as opposed to 2-3 per cent.

Seemingly the only substantial economic difference in New Zealand is that unemployment is already rising — but the increase from 4 per cent in September last year to 4.2 per cent in March still leaves its jobless rate well below Australia’s 5 per cent.

RBNZ seeks to get in front of the economic slowdown

The decision to cut rates appears to be based on a different approach to monetary policy, with the RBNZ looking to support growth ahead of a substantial rise in the jobless rate.

“Employment is near its maximum sustainable level. However, the outlook for employment growth is more subdued and capacity pressure is expected to ease slightly in 2019. Consequently, inflationary pressure is projected to rise only slowly,” the RBNZ said in its post-meeting statement.

“Given this employment and inflation outlook, a lower OCR [overnight cash rate] now is most consistent with achieving our objectives and provides a more balanced outlook for interest rates.”

Recently, Australia’s Reserve Bank revealed its formula for a rate cut was continued low inflation plus a rise in unemployment.

However, at yesterday’s meeting, it seemed to have moved towards the RBNZ’s approach.

Jobs the key to rate cuts

The Reserve Bank now says it might cut interest rates even if the unemployment rate remains the same.

“[The RBA board] recognised that there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target,” RBA governor Philip Lowe noted in his post-meeting statement.

Like in New Zealand, it seems that stable unemployment near what economists used to consider “full employment” levels is not enough to boost wages and consumer prices in Australia.

Yet the RBA wants to wait a little longer before doing anything about it.

It’s not the first time the Kiwis have been ahead of their trans-Tasman counterparts.

New Zealand authorities moved first to place stricter home-lending restrictions on banks to cool its own overheating housing markets, before Australia’s bank regulator APRA belatedly followed suit.

Has the RBNZ again shown the way forward for its counterparts across the ditch?

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