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

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

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

New Zealand’s latest rate cut followed a 25 basis point reduction in August. 

The Kiwi cash rate is now at 4.75 per cent, putting it 40 basis points above Australia’s 4.35 per cent level.

Westpac’s New Zealand chief economist Kelly Eckhold is now expecting the RBNZ to cut rates again in November by another 50 basis points – taking it down to 4.25 per cent. 

He is expecting New Zealand’s cash rate to fall to 3.75 per cent in the first half of next year. 

The Reserve Bank of New Zealand acknowledged its 12 rate rises from 2021 to 2023 had caused the economy to shrink by 0.2 per cent in the year to June.

‘Economic activity in New Zealand is subdued, in part due to restrictive monetary policy,’ it said.

‘Business investment and consumer spending have been weak, and employment conditions continue to soften. 

‘Low productivity growth is also constraining activity.’

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

The Kiwi central bank also has a stricter 1 to 3 inflation target, compared with Australia’s 2 to 3 per cent band.

But it expected New Zealand’s headline inflation level to fall within its 1 to 3 target by September, as cheaper imports brought down inflation and fewer local businesses increased their prices. 

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

‘They also affirmed that monetary policy would need to 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 either rule in or rule out future changes in the cash rate target at this time,’ the minutes said.

The Reserve Bank of New Zealand on Wednesday slashed its cash rate by another 50 basis points – only weeks after the US Federal Reserve also cut rates by half a percentage point (pictured is Auckland)

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

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

Australia started raising rates later than New Zealand, with borrowers hit with 13 increases in 2022 and 2023.

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

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

A review, published by the RBA on Wednesday, suggested that in a future crisis, would direct its funding towards subsidising cheaper variable rate mortgages. 

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

‘The board would consider such a tool in extreme circumstances when the cash rate target had been lowered to the full extent possible,’ he said.

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

‘It helped prevent dire economic outcomes at a time when the outlook was bleak and highly uncertain, and there was limited scope for further cuts to the cash rate.’