SYDNEY: Australia is in a “difficult position” as it raised interest rates at a slower pace than peers following the post-pandemic surge in inflation, New Zealand central banker Karen Silk says, highlighting the divergent economic and monetary paths of the neighbouring economies.
Responding to questions about the differences in monetary policies, particularly Australia becoming the first major economy to hike rates this year, Reserve Bank of New Zealand (RBNZ) assistant governor Silk in an interview pointed to the nuances between their economic limits, fiscal positions and policy mandates.
“They’re talking about having persistent capacity pressures there that worry them and core inflation, not just headline inflation, which is outside the band,” Silk said of the Reserve Bank of Australia (RBA).
“We are sitting in a position where we’ve got core inflation very much inside the band and a significant capacity sitting in our economy.”
In other words, Australia can’t grow too fast or it unleashes further price pressures that will push rates even higher, while New Zealand can enjoy a rare period of inflation-resistant growth.
Australia and New Zealand’s deep historic, economic and cultural ties as former British colonies located in the southern hemisphere mean they’re often compared and contrasted.
Both are small, export-driven economies and their currencies are widely traded as liquid proxies for global risk sentiment.
The RBA earlier this month boosted borrowing costs by a quarter-percentage point and money markets expect a follow up increase in May with an even chance of a third hike this year.
In New Zealand, bets are for policy tightening to begin only in December.
Market expectations that even New Zealand will end up hiking this year help explain the Australian and kiwi dollars being among the best-performing G-10 currencies to date. But that’s where the similarities end.
The RBNZ opted for tough medicine after Covid by lifting its official cash rate (OCR) to 5.5%, driving the economy into recession and pushing up unemployment to crush inflation. The RBA took a more measured approach to lifting its benchmark and has kept unemployment very low by historic standards.
Both banks recently concluded easing campaigns: the RBA cut just 75 basis points in six months to August last year, and the RBNZ an aggressive 325 basis points over the 15 months to November.
But Australian policymakers have now been forced to return to tightening due to a rekindling of inflation that’s expected to remain above the top of the RBA’s 2% to 3% target all year.
The RBNZ’s OCR is currently at 2.25% and the RBA’s at 3.85% following this month’s quarter-point hike.
The differences between the two economies extend into fiscal policy as well.
Silk noted that while New Zealand’s government has focused on budget repair, Australia’s kept on spending, including subsidies to shield households during the original bout of high inflation.
“They had electricity subsidies going on, and a lot of investment still going into the public sector,” Silk said. “If you think about where a lot of that job growth over there was, it was in public sector roles.”
Silk’s willingness to delve into fiscal policy contrasts with the Australians, who have been at pains to avoid doing just that.
In an interview published in the Guardian newspaper yesterday, RBA deputy governor Andrew Hauser reiterated that it was beyond the remit of “unelected technocrats” to give the government advice on budget matters. — Bloomberg
