NZ Official Says Australia Faces Tough Choices on Interest Rates
Synopsis
A top official from the Reserve Bank of New Zealand has delivered a sobering message on Australia’s economic future. Karen Silk, Assistant Governor of the RBNZ said Australia is in an “awkward situation” while it tries to get inflation back under control. Although many had hoped that interest rates in the region would be nearing a peak, Silk said they might need to rise even higher before they can fall. Leading with a job market holding up and housing and energy prices “sticky,” the Reserve Bank of Australia is in a bind. This view indicates homeowners in Australia and New Zealand should brace for borrowing costs to stay high for some time yet as central banks are set on stomping out inflation before fostering growth.
The Reserve Bank of New Zealand’s Karen Silk warns Australia has a tough road with interest rates as inflation stays stubborn. While many are expecting rates to head south, the next rate move in New Zealand could be upwards, she said. Australia’s robust job market and pricey essentials are leaving the central bank struggling to extend the kind of help homeowners need.
Key Highlights
- Australia finds itself in a tough spot with the economy, says RBNZ’s Karen Silk
- New Zealand’s central bank is alerting that the next shift for interest rates could be up
- Banks are finding it difficult to lower borrowing costs, as high prices and sticky inflation make it hard for them to do so
- The jobs market remains robust in Australia and continues to put pressure on the Reserve Bank
- Neighbours are keeping an eye on each other in the face of soaring costs across the Tasman.
A Warning From Down Under
Australia is in a very difficult position with interest rates, says a Reserve Bank of New Zealand senior official. Karen Silk, who helps to lead New Zealand’s central bank, said in the statement that Australia is managing through an economy cooling more slowly than expected. Interest rates may have started sinking this year, many would hope, so too have hopes but Silk suggests that’s not the case. Her remarks come at a time when Australia and New Zealand are both wrestling with how to strike a balance between aiding homeowners and preventing prices from rising too swiftly.
Is Another Rate Hike Coming?
Silk says that for New Zealand the next move in interest rates is probably going to be up, not down. There remains “a great deal of uncertainty around how much people are spending, and where prices will go,” she added. The same problem dogs Australia. If the Reserve Bank of Australia thinks inflation isn’t easing toward its target, it may have no choice but to quickly hike its rates again. This would be a devastating blow to the household budgets of many families already weighed down by big mortgage payments and costly groceries.
Australia finds itself in such a horrendous position for one reason: It is actually doing well with jobs. As workers get more work, they earn more money to spend chasing a relatively small number of goods in high demand. The Reserve Bank would prefer to see the economy slow just enough that inflation falls, but not so much that people lose their jobs. Silk explained that this delicate balancing act is extremely difficult. With the Australian economy holding up relatively well, the central bank cannot comfortably cut rates without running another risk of a surge in the cost of living.
Sticky Inflation and High Prices
Economists frequently employ the term sticky to describe inflation that won’t budge. The price of the basics, including housing, electricity and insurance, is very high in both Australia and New Zealand. While the price of some items, such as clothes or electronics, might fall when trade barriers are lowered, these huge monthly bills jack up the overall inflation rate. Silk noted that as long as these costs remain in orbit, central banks have to maintain rates at elevated levels to deter spending. The result has been a waiting game, which is frustrating to businesses and consumers alike.
Watching Each Other Closely
Australian and NZ economies are tightly knit. In any case, when one central bank moves the other typically takes notice. Silk’s remarks suggest New Zealand is ready to keep policy tight for some time yet to do the job properly of defeating inflation. This is an important lesson for Australia, where there can be no assumption that the path to lower rates will be smooth. But while the two neighbours are still fighting the same war against higher costs, both of their leaders are also telling citizens that the days of easy money may not return for a long time.
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