So far this year, the Reserve Bank of Australia (RBA) has cut its benchmark interest rate from 6.25% to 5% but the Reserve Bank of New Zealand (RBNZ) has only cut its official cash rate (OCR) from 6.5% to 5.75%.
WestpacTrust says only Europe’s central bank has been slower to cut and that New Zealand’s OCR is the highest official rate among comparable countries. The European bank’s official rate has fallen 25 basis points to 4.5%.
"We find very little evidence that the New Zealand economy differs in terms of its business cycle position and relative inflation pressures," the bank says in a research paper.
It looked at each country’s spending, spare production capacity, inflation indicators, asset price developments, global trading patterns and prices, exchange rate competitiveness and interest rate sensitivity.
"On balance, New Zealand and Australia appear to differ very little. This suggests that the RBNZ could have matched the rate cuts of the RBA," says senior economist Paul Conway.
The two central banks have similar inflation targets and the two economies respond in similar ways to interest rate and exchange rate developments.
"This implies that New Zealand’s higher OCR is mostly explained by differences in policy attitude," Conway says. The RBNZ appears to be placing considerably more weight on current domestic developments while the RBA seems to be taking a more medium term approach and placing more weight on the "inevitable negative impact of the rapidly deteriorating global environment," he says.
Chief economist Adrian Orr says there’s more room for New Zealand interest rates to fall. The foundation of the economy’s recent growth has been the record low exchange rate, rainfall and past strong global demand.
"The domestic economy can, and must, run hotter than at present in order to weather the global slowdown. A further interest rate cut, and soon, appears cheap insulation from the looming global economic chill," Orr says.
