The very telling sign some very generous rate cuts are coming to Australia

Australian borrowers could be in for some huge rate cuts if New Zealand’s experience is any guide.

The Reserve Bank of New Zealand cut rates by another 50 basis points on Wednesday – just weeks after the US Federal Reserve also cut rates by half a percentage point.

The latest rate cut in New Zealand followed a 25 basis point cut in August.

The Kiwi cash rate now stands at 4.75 percent, putting it 40 basis points above the Australian level of 4.35 percent.

Westpac’s New Zealand chief economist Kelly Eckhold now expects the RBNZ to cut rates again by 50 basis points in November, taking rates down to 4.25 percent.

He expects New Zealand cash rates to fall to 3.75 percent in the first half of next year.

The Reserve Bank of New Zealand acknowledged that the 12 rate hikes between 2021 and 2023 had caused the economy to shrink by 0.2 percent in the year to June.

“Economic activity in New Zealand is subdued, partly due to restrictive monetary policy,” the report said.

“Business investment and consumer spending have been weak, and working conditions continue to deteriorate.

‘Low productivity growth also limits activity.’

New Zealand’s headline inflation rate of 3.3 percent in the year to June was lower than Australia’s level of 3.8 percent.

The Kiwi central bank also has a stricter inflation target of 1 to 3, compared to Australia’s range of 2 to 3 percent.

But it expected headline inflation in New Zealand in September to fall within the target range of 1 to 3, as cheaper imports pushed inflation down and fewer local companies raised prices.

In Australia, minutes of the RBA’s September meeting, released on Tuesday, suggested rate cuts in 2024 are now possible, despite Governor Michele Bullock ruling out support measures before Christmas in recent weeks.

‘They also confirmed that monetary policy should be sufficiently restrictive until members were confident that inflation was moving sustainably towards the target range and, based on the information available at the time of the meeting, that it was not possible to intervene or rule out future changes to the cash rate target at this time,” the minutes said.

The Reserve Bank of New Zealand cut rates by another 50 basis points on Wednesday – just weeks after the US Federal Reserve also cut rates by half a percentage point (pictured shows Auckland)

The Commonwealth Bank, Australia’s largest home lender, expects a rate cut in December, followed by four more cuts in 2025.

This would take the RBA cash rate to 3.1 percent for the first time since February 2023.

Australia started raising rates later than New Zealand, with borrowers receiving 13 rate hikes in 2022 and 2023.

During the pandemic in 2020 and 2021, the Reserve Bank of Australia provided $188 billion to banks to provide low-cost home loans as part of its Term Funding Facility (TFF).

This meant borrowers could get fixed-rate mortgages, starting with a ‘two’, while the RBA cash rate fell to a record low of 0.1 per cent.

A study published on Wednesday by the RBA found that funding in a future crisis would be focused on subsidizing cheaper variable rate mortgages.

Christopher Kent, the RBA’s assistant governor of financial markets, suggested that giving banks billions to provide cheap home loans would be a last resort.

“The board would consider such a tool in extreme circumstances if the cash rate target had been reduced as fully as possible,” he said.

‘The TFF met the objectives we set at the start of the pandemic.

“It helped avoid dire economic outcomes at a time when the outlook was bleak and highly uncertain, and there was limited room for further cuts in cash rates.”