The difference between the Australian and New Zealand economies couldn’t be more stark.

On the one hand, inflation hits a 13-year high of 4.5% in Australia in the year to June, and the Reserve Bank will hold rates steady, not increase them, as it waits for rate rises and the higher oil price to crunch the domestic economy to offset the pressures from the still booming resources sector.

Across the Tasman, the Reserve Bank of New Zealand cut rates unexpectedly today by 0.25% (three months ahead of time) as inflation surged towards a forecast 5% annual rate by the end of the year, and the domestic economy continued to slide into recession.

And that’s despite the boom enjoyed by the country’s highly efficient dairy sector which is the world’s biggest exporter and has enjoyed record returns.

Our domestic economy has to be slowed to lessen the inflationary pressures building in the economy (as we have seen with Victorian driven wage settlements for public servants and now building workers), in NZ, the central bank cuts rates to a still very high 8%, to start the process of slowing the slide into recession and to revive the economy.

Despite the differences between the two economies, the problems confronting both are similar. these comments from RBNZ Governor, Dr Alan Bollard, could have come from the measured lips of RBA Governor, Glenn Stevens.

Dr Bollard said in the statement this morning:

More unpleasant international news has emerged since the June Monetary Policy Statement, and there is a risk that the domestic economy will slow further. Moreover, the cost of funds raised abroad by banks has been rising in recent months as the international financial situation has deteriorated. Today’s cut will help to mitigate the effect of these increases on the actual borrowing costs paid by firms and households.

Recent oil and food price increases mean that annual CPI inflation should peak around 5 percent in the September quarter of this year. However, we expect that inflation will return inside the target band in the medium term. The weaker economy is expected to reduce pressure on resources, making it more difficult for firms to pass on costs and for higher wage claims to be agreed.

Economic activity is likely to remain weak over the remainder of 2008. The ongoing correction in the housing market, together with the very high oil prices, will limit household spending and constrain the extent of recovery. However, high export prices and an expansionary fiscal policy are expected to contribute to a gradual pickup in activity through 2009.

While the Kiwis are hoping for a slow rebound next year, the RBA expects the Australian economy to be still sluggish and perhaps not to start recovering until much later in the year; with inflation coming down to around 3% by mid 2010.

No one knows when the RBA will cut rates: after yesterday’s Consumer Price Index figures for the June quarter and 2008 financial year, the best bet is sometime in the first half of 2009.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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