The gap between the Australia and New Zealand economies opened further yesterday with the decision by New Zealand’s central bank to keep its main interest rate steady after the first meeting of the year.
The decision means NZ official rates will remain at 2.5%, probably until the middle of the year and is a sign of the wide difference in where the two economies find themselves at the start of 2010.
Australia is improving, but New Zealand is still edging its way into the black after last year’s slump.
Given that Australian companies dominate the NZ economy in many ways, you’d have to say the growth prospects look better here for the parents of banks like the NAB, media groups like Fairfax, and Harvey Norman.
Australian growth is stronger and better balanced and it is expected to see the Reserve Bank of Australia lift rates to 4% next Tuesday at its first meeting of the year.
“If the economy continues to recover in line with our December projections, we would expect to begin removing policy stimulus around the middle of 2010,” Reserve Bank Governor Alan Bollard said in a statement after leaving the official cash rate steady at 2.5%. His comments reiterated comments made on December 10 after the final meeting for 2009.
Mr Bollard said in the statement: “The outlook for the New Zealand economy remains consistent with the projections underlying the December Monetary Policy Statement.
“Global activity continues to recover, helping push New Zealand’s export commodity prices higher.
"Economic growth is most apparent in China, Australia, and emerging Asia.
"However, sustained growth throughout our trading partners is not assured, with many still facing impaired financial sectors and overall activity still reliant on policy support.
“Similarly, the New Zealand economy continues to recover. Policy stimulus and improving export earnings have seen a pickup in household spending.
"That said, households remain cautious, with credit growth subdued. Business spending remains weak.
“Annual CPI inflation is currently at the centre of the target band, and is expected to track comfortably within the band over the medium term.
“The economy is being assisted by both monetary and fiscal policy support. As growth becomes self sustaining, fiscal consolidation would help reduce the work that monetary policy might otherwise need to do.
“If the economy continues to recover in line with our December projections, we would expect to begin removing policy stimulus around the middle of 2010.”
The RBNZ has kept interest rates unchanged since April, buoying housing demand and helping New Zealand emerge from its worst recession in three decades.
Consumer prices fell in the fourth quarter, cutting market expectations that rates might rise in March.
The NZ dollar has been weak in the week or so since the December quarter CPI, showing a fall of 0.2%, was released last week.
It’s down by around 4% and news that rates are to remain on hold until midyear will take away more upward pressure on the currency.
So inflation remains in the centre of the RBNZ’s 1%-3% target band and is not expected to rise sharply "over the medium term” according to yesterday’s statement.
The central bank expects inflation to rise to around 2.6% by early 2012, so as long as that slow rate of growth is maintained, the pressure for a quick rate rise across the Tasman will not be there.
