New Zealand raises interest rates, but will Australia follow suit?

New Zealand’s central bank has raised its official cash rate by a quarter of a percentage point to 2.75% this morning, but Australian economists believe it’s unlikely the Reserve Bank will do the same.

Over the next two years the Reserve Bank of New Zealand expect the official interest rate to rise by 2%, as the New Zealand economy continues to strengthen.

RBNZ governor Graeme Wheeler said in a statement there is a need to return interest rates to normal levels in New Zealand.

“It is necessary to raise interest rates toward a level at which they are no longer adding demand,” he says.

“New Zealand’s economic expansion has considerable momentum, and growth is becoming more broad-based.”

While raising interest rates was in the interest of the New Zealand economy, NAB chief economist Alan Oster told SmartCompany any move on the official cash rate in Australia is a fair way off.

“The decision in New Zealand has absolutely nothing to do with Australia,” he says.

“We’re still in the minority view, but we think the RBA is more likely to cut rates than raise them because of fears about the unemployment rate rising, but it’s not likely to happen until November.”

Oster says the New Zealand economy has shown signs of significant strengthening, unlike the Australian economy.

“In New Zealand… there has been a big increase in the value of their lamb and dairy exports and among other things they’re also in the process of rebuilding Christchurch,” he says.

“It’s also had strong consumer confidence readings, growth is expected at plus 4% and inflation numbers are going toward the top end of the band. It’s clearly in need of a rates change.”

In the year to March, New Zealand’s GDP is estimated to have grown by 3.3%.

Oster says by the year’s end construction activity is anticipated to be up by 30% in New Zealand – a stark comparison with Australia where construction figures fell further into negative territory in February.

“The question today was not whether it was going to raise rates, but whether it was by 0.25% or 0.50%,” he says.

“There will be sustained rises over the next few months and with an election coming up in September, I wouldn’t be surprised if there were two rate increases before then.”

According to Wheeler, New Zealand’s booming construction sector and high prices for export commodities have pushed the country through its economic recovery.

“A rapid increase in net immigration over the past 18 months has also boosted housing and consumer demand,” he says.

“Confidence is very high among consumers and businesses and hiring and investment intentions continue to increase.”

CommSec economist Savanth Sebastian mirrored Oster’s thoughts, saying New Zealand’s “economic makeup” is completely independent from Australia’s.

“It doesn’t have the changes going on here in terms of the mining and its reliance on China isn’t to the same degree,” he says.

“The RBA has made it clear rates are on hold, it’s all about interest rate stability and allowing the economy to improve at a modest clip.”

Sebastian says forward indicators had been upbeat for Australian until recently, but now there’s been a dial back in consumer confidence, driven by concerns over unemployment.

“It comes down to the jobs story and unemployment will continue to rise over the next few months,” he says.

“I think the RBA will raise rates toward the end of the year. We have an economy improving, solid household wealth levels and when we’ve seen the way through the structural adjustment away from mining and there are improvements in the other parts of the economy, we will see rates moving back toward a normal setting.”