Despite experiencing a decline in inflation, Australia and New Zealand find themselves on distinct economic trajectories. While Australia’s economy continues to expand with record employment levels, New Zealand has entered a recession, accompanied by a significant decline in job opportunities. Over the past year, 32,000 fewer jobs have been available in New Zealand, prompting many citizens to relocate to Australia in search of better prospects.
Contrasting Interest Rate Strategies
The differing monetary policies of the Reserve Bank of New Zealand (RBNZ) and the Reserve Bank of Australia (RBA) have played a crucial role in shaping these economic outcomes. The RBNZ initiated interest rate hikes in October 2021, eight months ahead of the RBA, eventually peaking at 5.5%. Conversely, Australia’s interest rates reached a maximum of 4.35% before stabilizing. As economic conditions deteriorated, the RBNZ implemented its first rate cut in August 2024, whereas the RBA has yet to make a similar move. Market analysts anticipate that the RBA may introduce its first rate reduction in February 2025.
Employment Trends: A Stark Contrast
While both central banks raised interest rates to curb inflation, their labor markets have responded in contrasting ways. New Zealand’s workforce has remained stagnant, with many individuals ceasing job searches or migrating overseas. This has kept the official unemployment rate artificially lower than it would be if these individuals were still in the workforce. In contrast, Australia has experienced continuous labor force expansion, leading to a record-high number of employed individuals. The nation’s participation rate and employment-to-population ratio have reached unprecedented levels. As a result, Australia’s unemployment rate reflects a growing workforce, whereas New Zealand’s job market struggles are less visibly reflected in official statistics.
Inflation and Economic Stability
Both countries have made progress in reducing inflation, albeit within different target ranges. The RBNZ aims to keep inflation within a range of 1% to 3%, with a midpoint of 2%, whereas the RBA targets a range of 2% to 3%, focusing on a 2.5% midpoint. While inflation has declined in both nations, Australia has managed to maintain economic growth, avoiding a recession, whereas New Zealand has encountered significant economic headwinds.
Australia’s Resilience Against Recession
Australia has not recorded a single quarter of negative economic growth over the past three years, demonstrating its resilience. In contrast, New Zealand has experienced three quarters of stagnation and three quarters of contraction, resulting in a technical recession. Structural differences in the two economies and variations in export markets have contributed to these diverging economic outcomes.
RBA’s Balanced Approach to Inflation Control
The RBA has adopted a strategy that prioritizes employment retention while addressing inflation. Governor Michele Bullock emphasized in November 2024 that the central bank’s goal has been to return inflation to target levels within a reasonable timeframe while ensuring a gradual easing of labor market conditions to maintain sustainable employment levels. This approach has contributed to maintaining a strong job market in Australia, in contrast to New Zealand, where economic challenges have led to increased migration to Australia in pursuit of better opportunities.
Prospects for Homeowners
Since its last rate hike in November 2023, the RBA has maintained the cash rate at 4.35%. Financial markets anticipate that the first rate cut since November 2020 may soon be implemented, providing relief to homeowners. A 0.25 percentage point reduction could lower monthly repayments on a $600,000 mortgage by approximately $92. Larger loans, such as a $1,000,000 mortgage, could see a reduction of around $154 per month.
Expectations for Future Rate Cuts
There is widespread anticipation that multiple rate cuts may be introduced in 2025. The Australian Council of Social Service (ACOSS) has urged the RBA to ease interest rates, arguing that the current levels impose excessive financial strain on individuals with low and moderate incomes. Financial institutions also predict a series of reductions, with Commonwealth Bank of Australia (CBA) and Westpac forecasting four 25-basis point cuts, while National Australia Bank (NAB) anticipates five reductions. Australia and New Zealand Banking Group (ANZ) projects a more conservative outlook with two cuts.
Economic Outlook for Both Nations
As inflation continues to decline, Australia’s economy remains robust, supported by high employment levels and a steadily expanding labor force. The RBA’s measured approach to balancing inflation control with job preservation has placed the country in a relatively strong position. If rate cuts proceed as expected, homeowners could experience financial relief in the near future.
In contrast, New Zealand faces persistent economic difficulties. The ongoing recession and declining labor force suggest that challenges will persist despite the RBNZ’s efforts to stimulate the economy through interest rate cuts. While both countries have managed to curb inflation, Australia appears to be on a more stable and prosperous path moving forward.
