The rate-cutting cycle is over.<\/p>\n
That’s the considered view of the bulk of the nation’s economists and most certainly from the desk jockeys that bet on where interest rates may be heading.<\/p>\n
But there is a hardcore handful who believe the Reserve Bank of Australia should never have begun cutting in the first place, let alone have delivered three cuts this past year.<\/p>\n
Inflation is re-emerging, they argue, and supply is having difficulty keeping pace with demand.<\/p>\n
It’s a vindication of their argument that the RBA didn’t go hard enough when consumer prices across the developed world took off back in 2023.<\/p>\n
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Inflation climbed during the pandemic and peaked in 2022 in Australia. (AAP: James Gourley)<\/p>\n
Now, they have the knives out, arguing the RBA has lost the plot, again mounting the case for higher interest rates as soon as possible.<\/p>\n
But even with the benefit of hindsight, it’s a difficult argument to prosecute.<\/p>\n
Headline inflation had dropped from a peak of 7.7 per cent, down to near the RBA’s preferred band of between 2 and 3 per cent when the RBA began cutting early this year.<\/p>\n
That’s not just deceleration \u2014 that’s a chunky drop.<\/p>\n
Why interest rate hikes looking more likely<\/a><\/p>\n Without a swift lift in productivity, or a financial markets meltdown, mortgages borrowers could be in line for multiple interest rate hikes in 2026.<\/p>\n Clearly, the RBA’s rate hikes were highly restrictive. And clearly, they needed to be cut before the Australian economy went belly-up.<\/p>\n The critics also seem to have forgotten that the RBA has two mandates under its new compact with the federal government: to keep inflation in check and to maintain full employment.<\/p>\n That pretty much rules out pushing the economy into recession just so you can boast that you’ve slain inflation.<\/p>\n And until recently, it had a third, even more restrictive mandate<\/a>: to maximise “the economic prosperity and welfare of the Australian people”.<\/p>\n Price stability and full employment are enshrined in the RBA’s mandate. (ABC News: Stephanie Chalmers)<\/p>\n But hey, this cabal of critics is comprised of high-powered economic gurus. So, maybe they have a point.<\/p>\n Wouldn’t it be great if we could just pick out a nearby neighbour that went down the very path they are now suggesting, to see how it all worked out?<\/p>\n Somewhere, perhaps, like New Zealand.<\/p>\n An ill wind that blew no good<\/p>\n Wellington, the Kiwi capital perched at the bottom of the North Island, is a city of extremes.<\/p>\n Sublimely beautiful, the city and its surrounds hug the harbour and beaches with views that stretch all the way across Cook Strait.<\/p>\n On a clear and calm day, the waterfront is one of the most enticing places in the world.<\/p>\n But it’s a city of violent mood swings that can quickly flip the experience as Arctic winds from the south sweep straight up the harbour and through the city centre. They don’t call it Windy Wellington for nothing.<\/p>\n High interest rates have been a headwind in New Zealand’s economy. (Reuters: Marty Melville)<\/p>\n For the past three years, Wellington has endured a different kind of storm.<\/p>\n The retail centre has been hollowed out in a city littered with empty shopfronts, spurred on by public service lay-offs as the government attempts to slash costs.<\/p>\n And its housing market has been one of the worst performers in the country, noted for being one of the few where housing prices have been in decline.<\/p>\n Wellington has underperformed in the broader New Zealand housing market. (Supplied: Antipodean Macro)<\/p>\n This week, the September quarter gross domestic product (GDP) numbers are expected to show the economy has once again returned to growth.<\/p>\n But in the past three years, the country has oscillated between recession and mild recovery<\/a>.<\/p>\n It’s gone backwards in three of the past five quarters, and the rate at which Kiwis are exiting the country has reached record highs<\/a>.<\/p>\n In the past year, about 70,000 citizens left New Zealand, with around 60 per cent heading across the Tasman.<\/p>\n Loading…<\/p>\n While there have been others returning, the net loss of citizens was close to 50,000.<\/p>\n Many of those are of working age, but even that has failed to keep the unemployment rate below 5.3 per cent, the highest in more than a decade and a full percentage point higher than here.<\/p>\n Wages are poor, jobs are scarce, and the economy has been sliding backwards for more than two years.<\/p>\n Avoiding the mistakes of others<\/p>\n Being a trailblazer and visionary often has a downside. It’s a reputation that comes with baggage.<\/p>\n And, of all the world’s central banks, the Reserve Bank of New Zealand (RBNZ) is the one with that very image.<\/p>\n New Zealand has oscillated between recession and mild recovery under recent RBNZ policy. (Reuters: Marty Melville)<\/p>\n More than 30 years ago, it was the first central bank to decide to target inflation.<\/p>\n Until then, everyone thought economic stability meant keeping the exchange rate on an even keel.<\/p>\n So, when consumer prices first leapt skywards, it was the Kiwis who led the charge as the first central bank to begin raising interest rates in the post-COVID era<\/a>. They got in early with a rate hike in November 2021.<\/p>\n Inflation has fallen in Australia and NZ, but which is faring better?<\/a><\/p>\n Australia’s and New Zealand’s central banks have used different strategies to kill inflation. New Zealand’s now in recession, and Australia isn’t. Can Australia pull it off?<\/p>\n America, Australia and most other countries were reluctant to admit inflation was anything other than a passing fad. Transitory was the term du jour.<\/p>\n Not the Kiwis. They went nuts, pushing interest rates to a 5.5 per cent peak by June 2023 and staying there for a full year.<\/p>\n Our own RBA, meanwhile, didn’t go above 4.35 per cent, attracting a torrent of abuse for failing to match other central banks.<\/p>\n When the RBNZ began cutting in July last year, a vocal band of critics on this side of the ditch began lobbing grenades at the RBA, arguing that it too could have been cutting by then.<\/p>\n It was always a ridiculous argument \u2014 if only you’d slammed on the brakes so hard you’d locked up the wheels and run completely off the road, you’d now be able to desperately hit the gas to try and get back on track.<\/p>\n Affordable housing at enormous cost<\/p>\n When the RBNZ cut rates again last month, down to 2.25 per cent, it wasn’t because it was feeling generous.<\/p>\n Since July, the central bank has slashed rates by a full percentage point, in an increasingly desperate bid to kickstart some growth.<\/p>\n Inflation, however, remains stubbornly high at 3 per cent.<\/p>\n Property prices, meanwhile, continue to drift lower, with Auckland up just 2 per cent since 2023.<\/p>\n Loading<\/p>\n Losses on property are mounting.<\/p>\n Research group Cotality calculates that more than 12 per cent of sales<\/a> in the September quarter were struck at prices below purchase price \u2014 that’s a median loss of more than $NZ50,000 ($43,500) for vendors.<\/p>\n If it’s improved housing affordability you want, then that’s one way to achieve it. Run the economy into the ground with a punishing series of interest rate hikes and encourage your best and brightest to abandon ship and leave their homeland.<\/p>\n For anyone who’s ever lived through a recession, or anyone who’s ever tried to manage their way out of one, the one lesson you learn is that you just don’t ever want to be there.<\/p>\n It took Australia a decade to get unemployment levels back to where they were before the downturn in the 1990s.<\/p>\n By avoiding a recession, the RBA has managed to pull off the seemingly impossible.<\/p>\n<\/p>\n
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