Australian economists expect it’s highly likely that the Reserve Bank of Australia (RBA), whose board meets on Tuesday to discuss monetary policy, will announce an interest rate hike on Wednesday.
New Zealand economists expect our central bank will follow suit a week later when it releases its latest monetary policy statement.
However, a closer look suggests the differences are more compelling than the similarities. If the Australian economists are right, it will be the first time their central bank has raised interest rates in the current cycle.
If the Kiwi economists are correct, it will be our central bank’s third rate hike this year.
And the starting point of each bank was significantly different. The RBA’s official cash rate (OCR) is currently 4.25%. The lowest the Kiwi OCR got was 4.75%. It is already a full percentage point higher than Australia’s at 5.25% and some economists think it could go 50 basis points higher to 5.75% next week.
Australian economists are expecting only a 25 basis point move to 4.5%.
The impact on mortgage rates of these central banks’ differing policy stances is obvious. While New Zealand’s major home lenders are charging 7.2% on a variable or floating rate mortgage, their average Australian counterpart is charging only 5.8%.
The differences in fixed-rate mortgages are even greater. While the big five New Zealand banks charge between 8.2% and 8.25% for three-year fixed rate loans, the average in Australia is 7.11%. The New Zealand banks are charging between 8.4% and 8.6% for five-year fixed rate loans but the Australian average is 7.49%.
Given the differences, since central banks are supposed to raise interest rates when the economy’s pace of growth gets strong enough to start fuelling inflation, it would be natural to assume New Zealand’s economic growth and inflation are galloping away by comparison with Australia’s.
The figures don’t support that. Both nations’ economies grew at a hardly flash 2.4% pace in 2001, the latest figures available.
Australia’s consumer price index (CPI) rose 2.9% in the year ended March, but New Zealand’s CPI was up only 2.6% over the same period.
A key difference is that the RBA targets an underlying inflation rate between 2% and 3% while the Reserve Bank of New Zealand aims for between zero and 3%.
