As the US is ready to follow New Zealand's interest rate decrease and Australia's Reserve Bank awaits more solid evidence that prices have cooled, a rift has formed between the Pacific and Tasman Seas.
Due to persistent inflation in important areas like rents and utilities bills, Australians are facing the highest interest rates in over ten years, and mortgage relief is unlikely until next year.Why Australia's inflation and interest rate battle lags behind that of the US and New Zealand
Meanwhile, homeowners in nearby New Zealand are already experiencing a reduction in their monthly mortgage payments.
As North American inflation declines, Jerome Powell, the chair of the US Federal Reserve, is also indicating that interest rate reduction are on the horizon.
When the Fed meets next month on September 17–18, that cut is expected to take place, ending a prolonged rate halt in the US.
Various tactics
The "diverging patterns" between Australia and New Zealand, according to Westpac economists, are a reflection of how central bankers have responded to excessive inflation since COVID-19.
In New Zealand, rates peaked higher and started to decline more quickly after inflation sharply decreased.
Westpac economists stated on Tuesday that while inflation is declining on both sides of the Tasman, the decline in core inflation indicators in New Zealand appears to be more severe.
Interest rate hikes make it more difficult for businesses to sell, which restricts their capacity to raise prices without losing money. Central bankers use interest rates to affect demand for products and services.
In 2023, NZ's cash rate hike of 1.75 percent above its long-run neutral level caused a precipitous drop in demand, which Westpac forecasts would culminate in a recession.
They said that throughout the previous 18 months, "[New Zealand's] GDP had decreased by 0.5%."
"We project that activity shrank by an additional 0.6% during the June quarter, and a further 0.2% decline is anticipated during the September quarter."
As companies cease growing and even fail, unemployment has also increased. This has resulted in slower pay growth than in Australia since employers can more easily recruit workers.
After COVID, interest rates increased more in the US than in Australia, which in turn caused unemployment to rise.
However, US inflation has also decreased more quickly than Australia's, from 3.48 percent in March to 2.89 percent in July.
This has made it possible for the Fed to begin lowering interest rates as early as September.
On the other hand, according to Westpac, Australia's Reserve Bank is maintaining rates at 4.35 percent, which is just 0.85 percentage points higher than the long-run neutral level, and thus allowing greater inflation for longer.
With unemployment expected to peak at 4.6%, RBA Governor Michele Bullock has characterized the plan as "following a tight road" in an effort to guarantee employment growth continues.
While that is just somewhat higher than the trend rate, NZ's unemployment rate is predicted to increase to 5.6% in the upcoming year, far higher than its long-term trend of 4.5%.
Different dangers
In the years following the Covid epidemic, central bankers have been forced to follow their own courses due to the significant disparities between each economy and the risks associated with each method.
Although price rise has slowed significantly in New Zealand, the country is expected to experience a recession.
Even if unemployment has increased, the US has avoided an economic downturn and is therefore in a position to start rate decreases sooner.
Although it has suffered one when production is adjusted for population growth, Australia has so far escaped a general economic slowdown but must manage the risks of greater inflation.
According to economists, Australia runs the risk of a far more severe correction if expectations change and it accepts that inflation will stay beyond the 2 to 3 percent target band until late 2025.
In other words, when businesses and consumers decide how much to pay for goods or how much to set wages, they may grow accustomed to and start to expect existing rates of price growth.
It might be considerably more difficult for the RBA to get price growth back into the target range if that increased level of inflation is baked into the economy. It might even lead to another round of rate increases.
Although experts have cautioned that inflation expectations are frequently difficult to evaluate in real time and can put central bankers in reaction mode if they do start to alter, the RBA is keeping a watch on them.
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