- New Zealand has been very aggressive in countering inflation
- RBA aims to preserve Covid-era job gains while cooling prices
According to Bloomberg article published on April 19, 2023, New Zealand is on the verge of a recession as its aggressive rate increases take a toll on the economy. Across the Tasman Sea, the mood is brighter as Australia opts for a softer stance that has markets taking heed.
Earlier this month, Australia’s central bank paused its 11-month tightening cycle after 3.5 percentage points of increases. A day later, the Reserve Bank of New Zealand shocked markets with a bigger-than-expected move that took its cumulative increases to 5 full points, exceeding even the Federal Reserve.
Yet the kiwi dollar is sliding, especially against its Aussie counterpart, which is gaining from expectations that the Reserve Bank of Australia will succeed in engineering a soft landing while taming inflation.
“Markets are starting to factor in a RBNZ policy mistake,” said Peter Dragicevich, a currency strategist at Corpay Currency Research, adding that with the tightening phase nearing its end, markets are starting to pay attention to growth, labor market trends, and commodity prices. “On these metrics, we judge that the AUD should outperform the NZD,” he said.
The view is echoed by analysts from Barclays Plc to TD Securities, highlighting the diverging policy stance and the differing circumstances as the tightening cycle plays out, showing the RBNZ as among the most hawkish in the developed world while the RBA has taken a more measured approach.
Australia’s decision to press the pause button reflects its desire to maintain pandemic-era job gains and, if possible, avoid inflicting severe economic pain in its inflation battle. The RBA’s forecasts so far show the A$2.2 trillion ($1.5 trillion) economy will avoid a technical recession, defined as two consecutive quarters of declining gross domestic product.
New Zealand’s economy already went into reverse in the final three months of 2022 and the RBNZ said in February that GDP would fall for three consecutive quarters beginning in the current three-month period.
“The RBA’s decision to pause underscores its dovish hue,” said Su-Lin Ong, chief economist at Royal Bank of Canada. “It is reluctant to hike much more, is prepared to tolerate higher inflation compared with its global counterparts.”
Some economists warn that Australia is taking a risk in not moving to crush prices quicker, with inflation seen by the RBA to return to the top of its 2%-3% target only in mid-2025. New Zealand expects to hit its price goal in the second half of 2024.
Jonathan Kearns, a former RBA official, said in an interview this month that the central bank’s cash rate of 3.6% probably isn’t high enough for inflation that’s close to 7%, suggesting Australia will need to hike further and keep rates elevated for longer.
What works for the RBA is that when it comes to influencing mortgages, its policy settings have more potency as most households are on variable rates and are affected by adjustments quickly. In the minutes of its April 4 meeting, the central bank said the repayment on home loans as a share of disposable income, is anticipated to rise to around the highest on record.
In New Zealand, most mortgages are on fixed rates, making it harder for the RBNZ to achieve the same impact on households from policy adjustments.
Australia’s progress in thawing relations with China, its top trading partner, is also adding to its allure to investors. “The China reopening theme should also support AUD, especially if US data continues to slow relative to China and Europe,” said Mark McCormick, global head of FX strategy at TD Securities.
