Monetary policy in Australia and New Zealand will head in radically diametric directions this week as the regular meetings of the two countries’ Reserve Banks look set to provide very different decisions and post-meeting statements.
The RBA will sit pat and the RBNZ will lift its cash rate by a minimum of 0.25%, although the odd economist reckons a 0.50% rise can’t be dismissed for the impact it would have on confidence among home buyers.
The RBA will keep the cash rate steady at 0.1% and maintain the parameters of its bond purchase program in its October announcement – that is continue bond buying at a rate of $4 billion a week until mid-February.
In comparison, the RBNZ is forecast to lift the official cash rate by 25 basis points to 0.5% and to warn that more rises are in store, thereby raising the prospect of an increase at the late November meeting.
The RBNZ wants to choke off a house price boom that (like Australia’s) is unsustainable. The Kiwi central bank, though, is further down the track of trying to rein in the rapid rise in prices with the introduction of restrictions designed to control the flow of credit to buyers with low deposits and incomes.
The RBNZ would have tightened monetary policy back in August except for the surprise Covid outbreak, but decided not to increase the cash rate.
Despite Covid outbreaks, the Kiwi economy is further along the recovery curve than Australia is at the moment.
The RBNZ will join the central banks of Norway, South Korea and Brazil in lifting interest rates in recent months.
The Czech National Bank last week boosted its key rate by a large 0.75% to 1.5% to try and cool the economy and especially rising inflation. It started lifting rates in June by 0.25%.
The US Federal Reserve might lift rates next year, the Bank of England might follow suit but other central banks in Sweden, Japan and the European Central Bank won’t be lifting rates any time soon, though some might tighten slowly by scaling back their bond buying – which is what the RBA is now doing.
Australian economic data last week showed there is a bit more underlying strength in the economy than it seems.
The question is will that be sustained as we approach a re-opening with vaccine rates heading for 80% double vaxxed and can the underlying strength be sustained, or will it run out of puff in 2022?
Undoubtedly, the trade account looks much stronger than it looked just a month ago – the slump in iron ore prices has been more than offset by the surge in prices for coal and LNG – all benefiting from China’s ban on Australian coal exports in 2020 and heavy handed attempts to lower China’s carbon emissions.
India is heading in a similar direction with a shortage of coal for its network of power stations thanks to soaring prices for imports and tight state controls on prices for domestic coal.
The 1.7% slide in retail sales in August was better than market forecasts for a fall of 2.5% and came in the midst of the lockdowns in NSW, Victoria and the ACT (where retail sales fell 20% in the month off a small base).
On Thursday the Australian Bureau of Statistics August building approvals data surprised with a sharp rise instead of another month of weakness, while Reserve Bank credit data for August showed another large forecast rise in lending activity, with some of that again driven by investors.
At the same time, job vacancies for the three months to August fell but were still well above a year earlier, another sign of the underlying health of the labour market.