With a white-hot housing market and closed borders restricting the flow of workers, New Zealand has similar economic problems to Australia. But the solutions are vastly different.
- Money market traders had priced in the likelihood of the RBNZ raising interest rates in August
- Australia’s central bank has promised to hold rates down until 2024
- Both economies have relied on importing migrants to boost demand
Australia’s central bank is currently committed to holding down the official cash rate target at 0.1 per cent until “at least” 2024.
The key cash rate is used by banks to settle debts with each other overnight. Many other interest rates — like those for variable mortgages and personal loans — are related to the cash rate. When it rises, so do they.
The Reserve Bank of New Zealand was widely expected to hike its key cash rate by between 25 and 50 basis points at today’s meeting, but stopped when the nation’s first case of COVID in six months was discovered.
RBNZ holds fire on interest rates
In a statement, the Reserve Bank of New Zealand said its Monetary Policy Committee would keep the “current stimulatory level of monetary settings”, meaning the official cash rate remains at 0.25 per cent.
“Today’s decision was made in the context of the Government’s imposition of Level 4 COVID restrictions on activity across New Zealand,” it explained, meaning the rate is likely to rise in the near future if the outbreak can be contained.
The statement went on to detail the bank’s “least regrets policy stance”.
It wants to reduce stimulus, keep inflation expectations in check and continue what it calls “maximum sustainable employment”. But with the lockdown and “heightened uncertainty” the committee decided not to move the rate.
No cases? Rates to rise
So long as the outbreak is contained, the first rise in the cash rate since 2014 will happen at next month’s meeting, according to ANZ New Zealand’s chief economist Sharon Zollner.
“COVID cases, that’s the only data that matters over the next week or two,” she said.
“If we do manage to get on top of this — touch wood — then they’ll pick up.
“It seems pretty clear that if it hadn’t been for this curveball, then our expectation that the Reserve Bank would have become considerably more hawkish was indeed correct.”
Most economists predicted a rate rise due to the bank hitting its targets for employment and inflation — something Australia’s central bank has consistently failed to do.
COVID hasn’t ended
From midnight the nation moved to its strictest level of COVID alert. Schools and businesses are closed and there are only three reasons for people to leave the house: visiting supermarkets or pharmacies, exercise in their neighbourhood, or getting medical care or a COVID test.
“The key here is that the government cannot be confident about the scope of the problem. Further testing and tracing will be needed in the coming days to establish this,” Mr Gordon added.
Before the case was revealed, Ben Udy from Capital Economics predicted the central bank would lift rates by 50 basis points, citing the unemployment rate returning to “pre-virus levels” as more evidence the economy was moving too fast for the RBNZ’s liking.
“The New Zealand economy is clearly overheating and the bank’s mandates for both inflation and the labour market are now fulfilled,” Mr Udy, who previously worked in New Zealand’s Treasury, wrote earlier this week.
Money markets had agreed, pricing in the likelihood of a rate rise, again before reversing in the face of the latest Kiwi COVID scare.
New Zealand’s unemployment rate has fallen to near historic lows of 4 per cent.
The figure, higher for some groups, was a campaign promise when Jacinda Adern was elected to power in 2017.
“And the mainstream economic forecasters are all suggesting that unemployment will continue to fall,” said Craig Renney, director of policy and economist at the New Zealand Council of Trade Unions.
Australia’s employment is strong, but not to the Kiwi level, and set to be held back further by the extended lockdown in Sydney and recurring lockdowns in Melbourne and elsewhere among the eastern states.
Gareth Aird, head of Australian economics at the Commonwealth Bank said current lockdowns would weigh on any jobs recovery.
“It will take time for the labour market to heal once the economy reopens,” he wrote today.
“Our expectation is that the unemployment rate will not reach its June 2021 low of 4.9 per cent until mid‑2022. In contrast the RBA expects the unemployment rate to be 4.5 per cent by mid‑2022.”
Migration tap turned off
Around 10 per cent of the Australian population flew here in the past decade. Without them the nation would have had several ‘per capita recessions’, where economic growth goes backwards for multiple quarters.
But those migrants not only filled jobs, they created them. Adding 2.5 million people to Australia drove the construction, education and service industries in particular.
In New Zealand, the impact has been even bigger.
“So we went from around 4 million (people) to 5 million between 2003 and last year,” said Mr Renney.
“We’ve had a 20 per cent or 25 per cent increase in the population.
In both countries the tap has been turned off. For now, things are holding up, but workers are still waiting for stubbornly low wages to rise.
If the laws of supply and demand were followed, labour shortages would lead to wage rises. So far that has not happened, as revealed in the latest set of weak wages numbers released in Australia today.
Hot housing markets
Another parallel: the rocket rise of house prices in New Zealand mirrors Australia’s boom.
The median house price across New Zealand surged 25.2 per cent to a record $NZ826,000 in July, according to the latest data from the Real Estate Institute of New Zealand (REINZ).
That rise beats the soaring Australian market, which is seeing the median price of a home in Melbourne and Canberra shatter the million-dollar mark, joining Sydney’s seven-figure values.
It is “bonkers” said Craig Renney.
There have been substantial interventions in the housing market.
The Kiwi version of negative gearing has been axed, with banks now subject to more restrictions on loans and borrowing.
But it is difficult to say if they have had the desired effect.
“There’s been a range of things, but the honest answer is it’s really hard to disentangle especially in such a fast-growing market,” he said.
The growth in house prices might seem counter intuitive, because borders are locked and virtually no migrants or foreign students are looking for homes, a force that has helped propel prices for a decade.
But factors such as record low interest rates — boosting the amount people can borrow — a tight supply of properties, an inability to spend money travelling overseas and the reality of spending more time within four walls have boosted prices.
New Zealand is dealing with its problems in a different way to Australia. The months ahead will show which experiment is working best.