Economist explains inflation, interest rate conundrum
Differences in wages growth and priorities regarding unemployment are among the reasons why interest rates in Australia have not risen as rapidly as those across the ditch, a chief economist says.
The annual rate of inflation in both Australia and New Zealand reached 6% over the June 2023 quarter, according to ABS and Statistics New Zealand figures.
Bank of Queensland chief economist and head of market strategy Peter Munckton (pictured above) said that inflation pressures were a global story – prices have increased everywhere.
The peak in inflation was similar across Australia, New Zealand, the US and Europe, he said.
“It’s broadly a similar story absolutely everywhere … New Zealand has specific factors [such as] weather issues driving up prices, but by and large, it’s a global factor,” Munckton said.
Australia’s official cash rate is currently 4.10%, while the official cash rate in New Zealand is 5.50%.
Speaking on MPA Pod’s weekly podcast on Monday, Munckton said that although headline inflation in Australia and New Zealand was the same, there were differences in inflationary pressures and in the weightings applied by each of the central banks.
Higher wages growth in New Zealand necessitates a higher interest rates structure, Munckton said. Services inflation (e.g., prices for the rugby, opera or dining out) is viewed as one of the “‘stickier”’ aspects of inflation, and globally, services prices are still increasing slightly, he said.
Wages are a key cost for the services sector, which has had the effect of driving up wages in New Zealand, he said.
“Therefore, there are some more inflationary concerns in New Zealand than in Australia for that reason,” Munckton said.
Noting that unemployment in Australia is currently at a 50-year low (3.5% in the June 2023 quarter according to ABS), Munckton said that the RBA had made it clear that one of the outcomes it would like to achieve from this monetary policy cycle is lower inflation and maintaining low unemployment.
“The RBA would like to keep the unemployment rate as close to that as possible, or possibly somewhere in the low fours because that very low unemployment rate has great benefits to society,” Munckton said.
“Because the RBA has put a [slightly] greater weight on that outcome, it is being a little bit slower in terms of both raising rates and expectations about when it would like inflation to get back to a 2% plus number.”
Differences in mortgage rates across Australia and New Zealand
According to RateCity.com.au data on Monday, the average variable rate in Australia is 6.63% (based on an owner-occupier with a $500,000 mortgage paying principal and interest). The average lowest advertised variable rate per lender is 6%, and the average lowest variable rate for owner-occupiers with LVR of 80% or above is 6.11%. The average two-year fixed rate per lender is 6.36% (the average lowest 2-year fixed rate per lender is 6.22%).
According to interest.co.nz on Monday, the average standard variable mortgage rate across the main five banks in New Zealand is 8.6%. The average two-year fixed rate across the five banks is 7.2%.
Munckton said that New Zealand’s official cash rate of 5.50% is close to the level in the US, UK and Canada, all of which are in the 5% and above range.
Countries such as Australia, New Zealand and Canada have a fairly high level of household debt relative to their incomes, he said.
“Australia has a higher one than Canada and New Zealand and that’s another reason why the cash rate in Australia is likely to have a lower peak than other peer countries in this cycle,” Munckton said.
Among the other differences between Australia and New Zealand are slightly stronger population growth in Australia, differences in housing supply and in economic growth.
“Household debt in Australia is somewhat higher, which does make us somewhat more sensitive to interest rate changes than many other countries,” he said.
Inflation heading downwards
At 6%, inflation is currently around two percentage points lower than the peak of around 8%, and slightly lower than what the RBA had forecast, Munckton said.
Globally, availability of goods has increased as supply chain issues have eased. With demand slowing and supply increasing, this translates to lower prices, he said.
“That’s the reason why I think inflation will be going lower from here,” Munckton said.
While Australia is unlikely to have seen the last of official cash rate rises, at 4.10%, interest rates have come a long way over this cycle, he said.
What do you think about the differences in interest rates across Australia and New Zealand? Share your thoughts in the comments section below.
