Monday 12th of July 2004

Why is New Zealand’s Reserve Bank (RBNZ) so much more aggressive about raising interest rates than the Reserve Bank of Australia (RBA), asks William Cairns of Cairns Lockie. Last week, the RBA decided to leave its key interest rate unchanged at 5.25% for the seventh month in a row. It announced the decision made at last Tuesday’s board meeting on its website but provided no explanation. By contrast, last month, the RBNZ raised its official cash rate (OCR) from 5.5% to 5.75%, citing the economy’s strong growth over an extended period. It also flagged that further rate hikes are likely "It is interesting to compare the actions of our Reserve Bank with that of Australia. Both economies are broadly similar: unemployment is at low levels, retail sales are high, there is rising levels of household debt, with our housing market being a little firmer," Cairns says. "Does New Zealand require the highest cash rate and thus mortgage rates in the OECD? Is our economy so much more robust than that of Australia or the USA? We think not," Cairns says. Economists expect the RBNZ will raise the OCR again at its next review due July 29. Some key statistics suggest the RBA should be more inclined to raise rates than the RBNZ. New Zealand’s economy grew 3.6% in the year ended March while Australia’s grew 3.7% over the same period. New Zealand’s consumer price index rose 1.5% in the year ended March while Australia’s rose 2%. Australia’s housing approvals rose 1.5% in May but were 14% down from their June 2003 peak. New Zealand’s housing consents fell 0.5% in May, the fourth month in a row to show a decline, although May consents were 2.4% higher than in May last year. Australia’s retail sales rose 0.5% in May while New Zealand’s rose 0.1%. New Zealand’s labour market is certainly tighter than Australia’s with the Kiwi unemployment rate at 4.3% at the end of March (the latest figures available) while Australia’s was 5.6% in June.