ABC News, Thu 24 Jul, 2014
By business reporter Michael Janda
New Zealand’s Reserve Bank has lifted interest rates for the fourth meeting in row, taking the cash rate to 3.5 per cent.
The nation’s central bank is attempting to bring its cash rate back to more normal levels, after the RBNZ had kept rates at a low of 2.5 per cent for three years until March this year.
That 2.5 per cent cash rate was identical to the level that Australian interest rates have now been at for almost a year.
However, Australia’s smaller neighbour has been boosted by dairy and housing construction booms and, with growth forecast to hit 3.7 per cent this year, the RBNZ is trying to head off inflation pressures and a housing bubble.
TD Securities head of Asia-Pacific research Annette Beacher, who analyses both countries, says New Zealand’s growth has been in stark contrast to the Australian economy’s last six months, which have been “patchy at best”.
“Potential [non-inflationary] growth in New Zealand is actually rather low at 2.25, maybe 2.5 [per cent] at a stretch,” she said.
“They’ve actually exceeded that trend pace for the last four years, and that it certainly not the case in Australia where GDP growth has been printing below trend for the last couple of years.”
The RBNZ says the rate rises, along with regulations introduced late last year to limit low-deposit home lending, are working to take some heat out of the economy.
That has allowed what its governor Graeme Wheeler describes as, “a period of assessment before interest rates adjust further towards a more-neutral level.”
That “more-neutral level” is expected by the RBNZ to be around 4.5 per cent, and economists are expecting a resumption of rate hikes later this year.
Interest rate lessons from across the ditch
Annette Beacher says Australians should pay some attention to what is happening across the ditch, with New Zealand’s construction boom kicking off earlier than a housing boom now underway locally.
“The Kiwis are probably about 12 to 18 months ahead of Australia in terms of the construction cycle,” she said.
“We’ve already seen, for example, price pressures through construction rising at a double digit pace and, again, I think Australia will be there, but not until maybe another 12 months down the track as the Australian construction cycle has really only just started in the first quarter of this year.”
Ms Beacher – whose institution conducts a monthly inflation survey – argues that Australia’s Reserve Bank, and many other analysts, are too optimistic about price pressures easing.
“I’m not quite convinced yet that the RBA forward looking assesment of inflation is the right one, expecting the core inflation rate to gently decelerate to 2.5 per cent from here,” she said.
“I just can’t see it when you’ve got a strong construction cycle going forward, and the usual multiplier effects that emanate from that.”
The June quarter Bureau of Statistics Consumer Price Index out yesterday showed headline inflation running at an annual pace of 3 per cent – the top of the Reserve Bank’s 2-3 per cent target.
More concerning, the bank’s preferred ‘core’ measures that strip out volatile price moves also rose to average 2.8 per cent.
Ms Beacher says that leaves no room for further rate cuts, as a few in the market had still be speculating on.
RBA likely to be less aggressive
However, she does not see rate rises as imminent, with the RBA recently reiterating that it will remain on hold for some time and signal that it is considering rate rises well in advance of them occurring.
Ms Beacher explains that the overwhelming prevalence of variable rate home loans in Australia, compared to New Zealanders’ relative preference for fixed, means that the RBA is also likely to be much less aggressive when it does start raising rates.
“The RBA have traditionally maybe tightened consecutive months and then paused for six to 12 months, and then maybe tightened again,” she observed.
“We haven’t seen a strong tightening cycle from the RBA, only will the RBA possibly admit that they’re behind the curve will we see an aggressive tightening cycle, but I have to agree with consensus on this one, that it will be gradual.”
That certainly seems to be what major banks are betting on, with several moving yesterday to slash five-year fixed mortgage rates to 4.99 per cent.