Beating Inflation: Australia vs New Zealand

In the battle against inflation, the Reserve Bank of Australia (RBA) and Reserve Bank of New Zealand (RBNZ) took different approaches, which led to varying economic outcomes as inflation has now cooled.

At the end of the pandemic, both Australia and New Zealand faced similar inflation challenges. However, their policy responses were different enough to create distinct results.

The RBNZ implemented significant monetary tightening, raising interest rates by a total of 525 basis points, accepting that this would likely push the economy into a recession. As a result, GDP fell in 2024, the unemployment rate rose by nearly 2 percentage points, and inflation returned to the RBNZ’s target of near 2% by the second half of 2024.

In contrast, the RBA took a more cautious approach, raising interest rates by 425 basis points, acknowledging that it would take longer to bring inflation under control. GDP growth slowed to 1.1% in 2024, and the unemployment rate rose by just 0.6 percentage points. Core inflation has decreased more slowly, remaining above the RBA’s target but is expected to ease further.

Recently, the RBA cut its cash rate by 25 basis points, marking the first reduction in the easing phase, while the RBNZ has already delivered 175 basis points of easing since August 2024.

A useful way to assess which approach was more effective is the "misery index," which combines inflation and unemployment rates. If both factors are given equal weight, the RBA’s approach appears to have been more successful.

However, there remains some uncertainty about whether Australia will be able to sustainably reduce inflation to its target, as it’s still too early to make a definitive judgment.

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