New Zealand vs Australia: Why Is Our Official Cash Rate Higher?
The friendly trans-Tasman rivalry between New Zealand and Australia now has a new layer of competition, and this time it’s not on the sports field.
Cost of living differences between Australia and New Zealand are often discussed, and the closer you look, the more differences you can uncover.
Now that New Zealand’s Official Cash Rate (OCR) has reached 5.5% – while the rate across the ditch remains at 4.1% – questions are being raised over why there is a big gap between the neighbouring countries.
Let’s look at the factors contributing to this cash rate gap.
The Role of the Cash Rate
The cash rate, set by each country’s central bank, plays a crucial role in influencing borrowing costs, spending, and economic growth. It serves as a benchmark for interest rates across the economy, affecting everything from mortgage rates to business loans.
A higher cash rate generally implies tighter monetary policy, which aims to curb inflation by making borrowing more expensive and slowing economic activity. Conversely, a lower cash rate stimulates borrowing and spending to boost economic growth.
New Zealand's Cash Rate Journey
In New Zealand, the Reserve Bank has taken a proactive approach to combatting rising inflation.
We started 2022 with a cash rate of 1%. After a series of consecutive reviews in 2022 and into this year, the OCR has reached 5.5%, where it has settled at since May.
Australian Reserve Bank's Strategy
In contrast, the Reserve Bank of Australia (RBA) has gone down a more cautious path, despite facing similar inflationary challenges.
Australia started 2022 with a very low rate of 0.1%, which gradually increased to the current rate of 4.1%.
Why The Disparity?
One key distinction between the two countries lies in their respective inflation rates and labour market conditions.
New Zealand entered the pandemic with higher inflation than Australia, driven by factors such as wage growth and supply chain disruptions. Labour shortages in New Zealand, exacerbated by closed borders, have driven up wages, leading to pressures that create the need for a higher cash rate.
The Reserve Bank has indicated New Zealand’s cash rate will remain steady now, with potential OCR cuts in a year or so.
In Australia, their Reserve Bank’s slower response can be attributed to its initial policy approach, which allowed for a controlled rise in inflation. Both central banks are mindful of striking a balance between controlling inflation and supporting economic growth.
Australia is unlikely to have seen the last of official cash rate rises this year.
The Path Forward
The disparity in cash rates between New Zealand and Australia reflects each country’s unique economic circumstances and central bank strategies.
While New Zealand’s proactive measures aim to curb inflation amid labour shortages, Australia’s gradual approach acknowledges different economic conditions.
As central banks navigate this challenging time, borrowers and businesses in both countries will feel the ripple effects of these monetary policy choices.