Australian borrowers could see significant rate cuts if New Zealand’s experience is any guide.
The Reserve Bank of New Zealand cut its cash rate by another 50 basis points on Wednesday, just weeks after the US Federal Reserve also cut rates by half a percentage point.
New Zealand’s latest rate cut followed a 25 basis point reduction in August.
The Kiwi cash rate is now at 4.75 per cent, putting it 40 basis points above Australia’s 4.35 per cent level.
Westpac New Zealand chief economist Kelly Eckhold now expects the RBNZ to cut rates again in November by another 50 basis points, reducing them to 4.25 per cent.
He expects New Zealand’s cash rate to fall to 3.75 per cent in the first half of next year.
The Reserve Bank of New Zealand acknowledged that its 12 rate increases between 2021 and 2023 had caused the economy to contract 0.2 per cent in the year to June.
“Economic activity in New Zealand is weak, partly due to tight monetary policy,” he said.
Australian borrowers could face significant rate cuts if New Zealand’s experience is any guide after the country’s cash rate was cut by 50 basis points (file image)
‘Business investment and consumer spending have been weak and employment conditions continue to weaken.
“Low productivity growth is also limiting activity.”
New Zealand’s headline inflation rate of 3.3 per cent in the year to June was lower than Australia’s 3.8 per cent level.
New Zealand’s central bank also has a tighter inflation target of 1 to 3, compared to Australia’s range of 2 to 3 percent.
But it expected New Zealand’s overall inflation level to fall within its target of 1 to 3 by September as cheaper imports reduced inflation and fewer local businesses raised their prices.
In Australia, minutes from the RBA’s September meeting, released on Tuesday, suggested rate cuts were now possible in 2024, despite Governor Michele Bullock in recent weeks ruling out pre-Christmas easing.
“They also stated that monetary policy would have to be sufficiently restrictive until members were confident that inflation was moving sustainably towards the target range and, based on the information available at the time of the meeting, that it was not possible neither rule nor rule out future changes to the cash rate target at this time,” the minutes said.
The Reserve Bank of New Zealand cut its cash rate by another 50 basis points on Wednesday, just weeks after the US Federal Reserve also cut rates by half a percentage point (pictured, Auckland) .
Commonwealth Bank, Australia’s largest property lender, expects a rate cut in December, followed by four more cuts in 2025.
This would reduce the RBA cash rate to 3.1 percent for the first time since February 2023.
Australia started raising rates later than New Zealand, with borrowers seeing 13 increases in 2022 and 2023.
During the pandemic in 2020 and 2021, the Reserve Bank of Australia provided $188 billion to banks to make cheap home loans as part of its Term Funding Facility (TFF).
This meant borrowers were able to get fixed-rate mortgages starting with a ‘two’, as the RBA cash rate fell to a record low of 0.1 per cent.
A review, published by the RBA on Wednesday, suggested that in a future crisis it would direct its funding towards subsidizing cheaper variable rate mortgages.
Christopher Kent, deputy governor for financial markets at the RBA, suggested giving billions to banks to provide cheap home loans would be a last resort.
“The board would consider such a tool in extreme circumstances, when the cash rate target would have been reduced to the greatest extent possible,” he said.
‘The TFF met the objectives we set for it at the beginning of the pandemic.
“It helped avoid dire economic outcomes at a time when the outlook was bleak and highly uncertain, and there was limited scope for further cuts to the cash rate.”
