Australia and New Zealand have both seen inflation fall, but their economies are on different paths. New Zealand is in recession, with 32,000 fewer jobs than a year ago. Thousands of Kiwis are moving to Australia in search of better opportunities. Meanwhile, Australia’s economy continues to grow, with a record number of people employed.
Interest Rate Strategies Differ
New Zealand’s Reserve Bank (RBNZ) started raising interest rates in October 2021, eight months before Australia’s Reserve Bank (RBA). The RBNZ pushed rates higher, peaking at 5.5%, while Australia’s peak was 4.35%. Now, the RBNZ has already begun cutting rates, delivering its first reduction in August 2024.
The RBA has yet to cut rates, but markets expect the first reduction at its next meeting on 17-18 February.
Also Read: Australian Inflation Rate Hits Three-Year Low, Raising Hopes for Interest Rate Cuts
Unemployment Rates Tell a Different Story
Both central banks hiked interest rates to slow inflation, knowing it would push unemployment higher. But job market trends in both countries look very different.
New Zealand’s labour force has not grown in the past year. Many Kiwis have stopped looking for work or moved abroad, which keeps the official unemployment rate lower than it would be otherwise. If these people were still in the job market, the unemployment rate would be much higher.
Australia’s labour force has grown consistently for the past 12 months. The country now has a record number of employed people. The participation rate and employment-to-population ratio have hit all-time highs.
This means Australia’s unemployment rate reflects a growing labour force, while New Zealand’s hides deeper economic struggles.
Inflation Trends in Both Countries
Australia and New Zealand have different inflation targets. The RBNZ aims to keep inflation between 1% and 3%, focusing on a 2% midpoint. The RBA targets a range of 2% to 3%, with a midpoint of 2.5%.
Both countries have successfully reduced inflation, but Australia’s economy has avoided a recession while New Zealand’s has struggled.
Australia’s Economy Avoids Recession
Over the past three years, Australia has not recorded a single quarter of negative growth. In contrast, New Zealand has had three quarters of zero growth and three quarters of negative growth. It is now in a technical recession after six consecutive months of negative growth.
Interest rates are not the only reason for these different outcomes. Australia and New Zealand have different economic structures and export markets, which have influenced their recovery.
RBA’s Focus on Employment
Australia’s RBA has taken a different approach to inflation control. It has prioritised employment while still working to bring inflation down.
“The [RBA] board’s strategy over recent years has been to set monetary policy in a way that returns inflation sustainably to target in a reasonable time-frame, alongside a gradual easing in labour market conditions to levels consistent with sustainable full employment,” RBA Governor Michele Bullock said in November.
“The goal underpinning this strategy has been to preserve as many of the jobs that have been created over recent years as we can,” she added.
Thousands of New Zealanders have shown their preference for Australia’s strategy by relocating.
Homeowners Could Get Relief Soon
The RBA has held the cash rate steady at 4.35% since its last hike in November 2023. Financial markets now expect the first rate cut since November 2020.
Canstar estimates that a 0.25 percentage point rate cut would reduce repayments on a $600,000 mortgage by $92 per month.
“This is based on an owner-occupier paying principal and interest on the average variable rate of 6.33 per cent and 25 years remaining on the loan,” Canstar said.
For a $700,000 mortgage, monthly repayments would fall by $108. A $1,000,000 loan would see a reduction of $154 per month.
Experts Expect Multiple Rate Cuts
The Australian Council of Social Service has urged the RBA to lower rates.
“With inflation consistently falling and firmly in the target band, it’s hard to justify leaving rates this high,” ACOSS chief executive Cassandra Goldie said.
“Raising the cash rate has dramatically increased financial stress among people on low and modest incomes. It’s time to finally give people some desperately needed relief,” she added.
Banks also expect several rate cuts this year.
CBA predicts four 25-basis point cuts in 2025, bringing the cash rate down to 3.35% by the end of the year. Westpac also expects four cuts, while NAB forecasts five and ANZ two.
The Outlook for Australia and New Zealand
Australia’s economy remains strong, with high employment and a growing labour force. The RBA has balanced inflation control with job preservation. If rate cuts arrive soon, homeowners could see financial relief.
New Zealand, however, faces deeper economic challenges. Its recession and shrinking labour force suggest more difficulties ahead. The RBNZ’s early rate cuts may help, but structural issues remain.
As inflation falls in both countries, Australia appears to be in a much stronger position.
