Australians 'played for fools' as New Zealand cuts interest rates: 'RBA looking very silly'

The Reserve Bank of Australia (RBA) is coming under even more pressure to cut the official interest rate after New Zealand did just that. One of Australia's biggest neighbours has dropped the cash rate by 0.50 percentage points, which is the second consecutive decrease from meeting to meeting.

Economist and Yahoo Finance contributor Stephen Koukoulas believes the move makes the RBA "look silly" for not following countries like New Zealand. Australia's interest rate of 4.35 per cent is below New Zealand's new rate of 4.75 per cent, but Koukoulas said that shouldn't matter.

"The RBA has played a lot of people for fools - saying: 'We didn't hike as much as others which is why we are not cutting'," the former senior economic advisor to the Prime Minister wrote.

"Anyone with a smidgen of knowledge on the issue knows this is rubbish."

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In addition to New Zealand, China, the US, England, the European Central Bank, and Sweden have all cut their official cash rates recently and some are tipped to go even further in the coming months.

Koukoulas has argued the RBA should jump on the trend when the board next determine the cash rate in November as Australia's economic situation is similar to New Zealand.

The Reserve Bank of New Zealand (RBNZ) noted that the weak economy and falling inflation were factors in its decision to cut rates.

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"Members agreed that increasing excess capacity is leading to lower inflationary pressure in the New Zealand economy," the RBNZ said.

"Economic growth is weak, in part because of low productivity growth, but mostly due to weak consumer spending and business investment. High-frequency indicators point to continued subdued growth in the near term. Some exporting businesses have been supported by higher export prices, particularly in the dairy industry."

The central bank believes the cut of 0.50 percentage points will "achieve and maintain low and stable inflation" while also hopefully avoiding instability in output, employment and the exchange rate.

The latest figures for Australia showed headline inflation had recently dropped to its lowest point in nearly three years to just 2.7 per cent in the 12 months to August, which is down from 3.5 per cent in July.

However, a major factor driving the rate down was government energy subsidies.

Trimmed inflation came in at 3.4 per cent for August, which is still a considerable drop from the 3.8 per cent in July.

RBA won't be swayed by international movements

RBA governor Michele Bullock has been asked why Australia has been keeping interest rates on hold for 2024 when other countries are moving down.

“Most of those countries had official interest rates up around 5 or over 5 per cent, so in our judgement, we look at how restrictive some of those countries are relative to us,” she explained at the most recent press conference.

“We’re restrictive, but we think they’re more restrictive than us.

“We didn’t go up as high. We haven’t seen the same deterioration of the labour market some of these countries have seen yet, and we are yet to see some of this inflation that they are, but we’re watching for that.”

The US Federal Reserve recently cut rates by 0.5 percentage points to a range of 4.75 to 5 per cent. The previous rate was a 23-year high.

Economist Richard Holden told Yahoo Finance that other markets are only in a position to cut rates because they were higher than Australia.

"It's a real shame that we didn't do what the US and the UK and Canada and Europe and New Zealand did, which was take our medicine early on, raise rates more aggressively, deal with the problem, not be so lavish with government spending," he said.

"You can see the fruits of that... look at America... that's the story of what we should have done, and we haven't done it, and we're all paying the price for it."

Could there be a rate cut before the end of 2024?

Bullock has been fairly direct with Aussie homeowners and said the RBA did not expect to cut rates this year.

She wants to see trimmed inflation fall into the 2-3 per cent target zone before any type of mortgage relief can be dished out.

But minutes from the RBA's September meeting shed an interesting light on what could happen over the next few months.

The RBA board ditched the grim warning that there would be no interest rate cuts in the near future and said it wanted to keep its options open.

Commonwealth Bank (CBA) head of Australian economics Gareth Aird said the September minutes were “a lot less hawkish” than August and had a “dovish tilt”.

“The September Board Minutes have removed the line that, ‘it was unlikely that the cash rate target would be reduced in the short term’,” Aird said.

“We view this change as significant. The Board has now back-pedalled from its forward guidance.”

He believes the first rate cut could come in December with a 0.25 percentage drop, with a total of 1.25 per cent decrease by the end of next year.

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