Data shows that at the June 2024 peak, Australian home loan payments were 35 percent higher than pre-Covid. New Zealand's were 47 percent higher. (File photo) Photo: Unsplash/ Li Rezaei
New Zealanders have been much harder hit by interest rate rises than Australians since the pandemic, and one economist says the country would be in better shape if the Reserve Bank had followed the trans-Tasman example.
Infometrics data shows that, at the June 2024 interest rate peak, Australian home loan payments were 35 percent higher than pre-Covid. New Zealand's were 47 percent higher.
Australia's cash rate peaked at 4.35 percent. New Zealand's reached 5.5 percent.
In the UK, payments were 54 percent higher but Infometrics chief forecaster Gareth Kiernan said most lending was on a five-year rate so fewer people were exposed to the peak.
Kiwibank chief economist Jarrod Kerr said it was the sharpest hiking cycle ever recorded from the Reserve Bank.
"They were super aggressive and they were very worried about inflation - justifiably, but they were very worried, whereas the RBA was like, 'we need to put interest rates into restrictive territory. We just don't need to go as hard'… they were much more willing, much more relaxed to let things roll.
Kiwibank chief economist Jarrod Kerr. (File photo) Photo: Supplied / Gino Demeer
"It proved to be the better approach. You know, the Australian economy didn't record a recession. They did in per capita terms, but they didn't record an outright recession. Whereas we recorded quite a deep one."
While the Reserve Bank had since cut "aggressively", the Reserve Bank of Australia had only cut by 75 basis points.
"They simply didn't drive their economy into a hole. So I think you can look at the last couple of years and think 'I'd rather the RBA approach'."
He said both had made mistakes during the pandemic.
Kiernan said Australian banks were more responsive to reductions in the cash rate over the longer-term fixed rates.
Compared to a the drop in the cash rate, by July this year, [in New Zealand] one-year rates were down 243bp from their December 2023 peak, two-year rates down 207bp since November 2023, three-year rates down 172bp since November 2023, four-year rates down 112bp since December 2023, and five-year rates down 103bp since December 2023.
In Australia, compared to a 75bp drop in the cash rate, floating rates were down 53bps since July 2024, and fixed rates for less than three years were down 68bp over the same period.
"The latter were another 15bp higher in January 2024, making for a total drop of 83bp. Fixed rates for over three years were down 38bp since July 2024 and a total of 92bp since their peak in February 2024," Kiernan said.
Miles Workman, senior economist at ANZ, said if the OCR had not reached the peak it had, it would probably be higher now.
"It's difficult to quantify, but there was an element of shock value in the RBNZ's response to the inflation surge that followed the pandemic, with the RBNZ essentially telling us they are going to induce a recession.
"That likely added a degree of potency to monetary settings at the time, potentially enabling the RBNZ to get away with a lower than otherwise peak in the OCR. In other words, you could argue that a more gradual approach to past tightening would have been less effective on a per basis point of tightening basis and may have ultimately required an even more prolonged period of interest rate squeeze.
"It's also worth noting that New Zealand experienced a larger and more prolonged fiscal expansion than Australia, and that necessitated a higher OCR than otherwise.
"If the government chooses to expand at a time when there is no spare economic resource to accommodate that then much of the expansion is going to end up in higher than otherwise inflation pressures, and therefore higher than otherwise interest rates - that squeezes out the private sector in order to accommodate a larger public sector."
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