Australian Economy

The Reserve Bank can look across to New Zealand for a hint on Australia’s economic future

In the race to level out from the COVID-induced economic rollercoaster, Australia’s Pacific neighbours, New Zealand, have the ball firmly gripped in their hands and are about six strides in front.

After cutting rates during COVID, the Reserve Bank of New Zealand (RBNZ) was one of the first to do a U-turn and started increasing its official cash rate (OCR) in October 2021.

Its first increase was one-quarter of a percentage point, with a couple more same-sized rate rises after that.

But it really ramped up in April, hiking by half a percentage point, followed by another double hike in May.

The RBNZ is widely tipped to go for another half a percentage point rate hike today, at midday AEST.

That would take its OCR from 0.25 per cent in September 2021, to 2.5 per cent by July.

“There’s an awful lot of people who can’t remember the last time the Reserve Bank deliberately slowed down the economy in order to beat inflation,” ANZ chief economist Sharon Zollner told The Business ahead of the decision.

Which is exactly what the RBNZ, the Reserve Bank of Australia (RBA) and central banks around the world are trying to do by raising rates.

“It’s not a fun process, not nearly as pleasant or easy to explain as trying to boost growth,” Ms Zollner said.

New Zealand’s inflation rate of 6.9 per cent is around treble its target of between 1 and 3 per cent.

That could make it something of a canary in the coal mine, a test case for the RBA to watch as it tussles with bringing inflation down from 5.1 per cent.

Are the rate hikes working?

New Zealand flag in front of civic buildings
The New Zealand Reserve Bank was an outlier when it lifted its official interest rate for the first time since the pandemic, in October 2021.(AP)

Residential property prices in New Zealand peaked in November 2021, and the 1.75 percentage points’ worth of rate hikes have seen prices fall just shy of 6 per cent since then.

“The impact on housing is pretty clear,” Ms Zollner said.

But she warned there is much further to fall. 

She said house prices would need to fall 30 per cent to get back to pre-COVID levels.

“Very few people are sitting in a house that’s worth less than they paid for it, even fewer in a house that’s worth less than the debt that they owe on it,” she said.

Home prices in New Zealand are generally tipped to fall 10 to 15 per cent.

A woman wearing a black jacket.
ANZ chief economist Sharon Zollner says New Zealand house prices have further to fall.(Supplied)

Forecasts are similar for Australian real estate, even though rates here have so far risen by a smaller 0.85 percentage points, and national average property prices are down only half a per cent so far.

Consumer confidence is also slipping in New Zealand.

“That fall started perhaps before interest rates started going up, but it’s all part of, from where the consumer sits, a much higher cost of living,” Ms Zollner said.

“That, of course, is centred in necessities like food, petrol and mortgage payments and, if you’ve got debt as well, it all feels like part of the same kind of pressures for households.”

Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button

Get our latest downloads and information first. Complete the form below to subscribe to our weekly newsletter.