Central banks in New Zealand and Australia on Wednesday showcased starkly different approaches in their battle to quell inflation — illustrating a choice that most of their developed-world peers also confront.
(Bloomberg) — Central banks in New Zealand and Australia on Wednesday showcased starkly different approaches in their battle to quell inflation — illustrating a choice that most of their developed-world peers also confront.
New Zealand policymakers surprised markets with a bigger-than-expected interest-rate increase, sending the kiwi and bond yields racing higher. Across the Tasman Sea just 30 minutes later, Reserve Bank of Australia Governor Philip Lowe used a speech to explain his decision Tuesday to pause his almost yearlong hiking cycle, saying he’s prepared to be more patient in bringing down prices.
As the steepest global tightening cycle in decades nears its end, the RBNZ-RBA divergence reflects a developed-world trend where some central banks are moving to the sidelines to assess the impact of their moves, while others keep on hiking for fear a pause would undermine progress in taming prices.
European Central Bank officials over the past week have started signaling that rate increases will soon end.
“The RBNZ and the RBA continue to choose startlingly different paths in the face of very similar inflation numbers,” said Sharon Zollner, chief economist at ANZ Bank New Zealand in Auckland.
US 10-year yields dropped to the lowest level since September overnight after soft labor-market and services industry data underscored concerns the word’s largest economy is headed toward recession.
The RBNZ’s surprise half-percentage point hike brings its cumulative tightening to 5 percentage points — that’s even more than the Federal Reserve’s 4.75 points. The RBA stood pat at 3.6% for a total increase of 3.5 points.
Markets bet the disconnect will continue, with the RBNZ seen hiking by another quarter-point to 5.5%, while the RBA is seen staying on hold and then switching to rate cuts late this year.
At the heart of the contrast is the two central banks’ assessment of their labor markets and workers’ response to ultra-low unemployment. In New Zealand, wage growth is surging above 8% compared with just 3.3% in Australia. While the figures are for the final three months of 2022, timely measures of wages in Australia suggest labor costs remain contained.
That allowed Lowe to pause and acknowledge in a speech Wednesday that the RBA is prepared for a “slightly slower” return of inflation to its 2-3% target in order to preserve pandemic-era labor market gains. The RBNZ, in its release, restated that employment remains beyond its maximum sustainable level.
Lowe said the RBA’s rate-setting board will wait longer for inflation to return to 3%, saying that’s “a better outcome” than getting there a year earlier at the cost of more jobs. By contrast, the RBNZ said Wednesday “the sooner supply and demand were better matched in the economy, the lower the overall cost of reducing inflation.”
The RBA’s forecast shows Australian inflation will hit 3% in 2025, while the RBNZ sees inflation hitting that level next year.
That shows the RBNZ’s “stitch in time” logic in reducing inflation, said Kelly Eckhold and Michael Gordon at Westpac Banking Corp. “Once the RBNZ has a notion of where the OCR needs to be, it’s better to get there quickly than to draw it out,” they said, revising their forecast to add one more hike to 5.5%.
The RBNZ has tightened aggressively and accordingly expects a recession this year. For Australia, bond markets are not yet implying the economy will fall into contraction — a vote of confidence in Lowe’s strategy.
In New Zealand, two-year yields are 69 basis points above 10-year yields, the deepest inversion since the 2008 global financial crisis era.
“The RBNZ’s rate hike today is an example of how the antipodean reaction functions are different,” Citigroup Inc. economists said. “The NZ economy is contracting and monetary policy is considerably tighter compared to Australia, yet the RBNZ today delivered a higher than expected OCR increase.”
In contrast, they said, Lowe’s speech “cemented our long-held view that the RBA is different compared to its peers because it is prepared to let inflation run hotter.”
(Adds ECB context in fourth paragraph, Treasury yield move in sixth.)
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