Key points
  • The RBNZ has cut the cash rate by 0.5%, dropping to 2.5%.
  • Rates in New Zealand have come down by 300 bps in just over a year.
  • RBA unlikely to follow suit given Australia's stronger economic position, but "downside risks" to growth are still present.

New Zealand's cash rate is now 2.50% after 300 basis points' worth of cuts since July last year; it was 5.5% as recently as July 2024, 1.15 percentage points higher than the RBA's peak cash rate.

Many economists thought rates would come down by 25 bps, but the RBNZ said the contraction in New Zealand's GDP from April to June (-0.9%) was "considerably larger than expected" and that weak economic activity merited a double sized cut.

The cuts came despite the RBNZ acknowledging inflation is "currently around the top of the 1-3% target band" - prices rose 2.7% over the twelve months to June.

ANZ New Zealand Chief Economist Sharon Zollner said the decision may have been intended as a signal that the economy isn't in for a prolonged downturn.

"I would characterize this as front loading of the easing [the RBNZ] already indicated they would do back in August, with a view to shoring up confidence," she explained.

The RBNZ remains "open" to further cuts after the October decision, and ANZ is officially predicting another 0.25% cut in November which would drop the cash rate to 2.25%.

Could RBA take note?

After unexpected price increases through August and September, combined with unemployment still at 4.2%, many economists now believe there will be no more cash rate cuts in Australia this year.

ANZ, NAB and CBA's economists have abandoned their forecasts of a rate cut in November; the next tip is February, though NAB says that could be pushed to May 2026.

However, from June '24 to June '25 inflation in Australia was lower than New Zealand's - the headline rate was 2.1%, with trimmed mean inflation (excluding volatile prices) at 2.7%.

Given the cash rate in Australia was already 60 bps higher than that of New Zealand before Wednesday's cut, some mortgage holders may be hoping the RBA decides to follow the example of the RBNZ and cut again in November.

New Zealand's recent peak in the cash rate of 5.5% was also much higher than Australia's, and its recent nadir much lower. 

Australia's mortgage market is also predominantly on variable rates, while New Zealand's is primarily fixed, making potential swings in the cash rate more acutely felt by the mortgage belt here.

Australia's economy appears in a significantly stronger position than New Zealand's, with a 0.6% GDP increase in the June quarter (0.2% per capita) likely part of why Governor Michele Bullock and the RBA feel they can afford to be cautious with loosening monetary policy.

Unemployment in New Zealand is also significantly higher, above 5% since December last year and most recently increasing to 5.2% in the June quarter.

At the moment there's not much to suggest growth in Australia could nosedive like New Zealand, but when she addressed media after the September decision Ms Bullock said "downside scenarios" remain a possibility.

"There's a lot of uncertainty around, there's still things going on overseas that might make people nervous, we know that consumer spending is a bit on the low side," she said.

"It's possible...there's some downside that eventuates and that affects the employment market, that would have different implications potentially for monetary policy."

Declining job ads canary in coal mine?

Unemployment in Australia has been between 3.9% and 4.3% since March 2024 in seasonally adjusted terms.

The labour market has been so steady that some economists including Commonwealth Bank's Harry Ottley believe the RBA should revise its estimate for the Non-Accelerating Inflation Unemployment Rate.

"Evidence suggests that inflation is coming back to target, we've seen wages growth come off and that is enough for [Commbank] to think we're around that level of full employment," he told the Savings Tip Jar podcast.

That would mean that if unemployment starts to increase significantly in the coming months, it may suggest the economy is not in as strong a position as it currently appears, so the latest Job Ads data from ANZ and Indeed may be slight cause for concern.

The number of advertised jobs has been declining for the past three months, dropping 3.3% in September in the largest monthly decrease since February 2024.

There were 4.3% fewer jobs available in September compared to the same point last year, which led ANZ economists to conclude labour market conditions "are beginning to ease".

However it's also worth pointing out there are still more than 10% more jobs advertised than in 2018/2019, and the RBA's view continues to be that the labour market is a little tight, so it remains possible policy makers won't be too alarmed if unemployment were to tick up closer to 4.5%.