The Roundup – February 2025
RBA Joins the Rate-Cutters Club
In response to progress on inflation and a weakening economy, 2024 saw most developed Central Banks initiate rate cutting programmes. However, Australia was a clear exception, lacking conviction that these trends were playing out, causing the Reserve Bank to hold interest rates at their November2023 peak for 15 months.
February saw the RBA deliver its first rate cut in over 4 years, as data for the final quarter of 2024 suggested inflationary pressures were receding. Slowing wage growth combined with weak housing and retail data added support to the idea that inflation is sustainably declining towards target, increasing the Board’s confidence to reduce interest rates.
However, recent labour data came in stronger than expected - the participation rate rose to an all-time high in January -causing the Bank to concede that the labour market was likely tighter than previously thought, highlighting the need to remain alert to inflationary risks.
Orr Goes More
While Australia and New Zealand’s Reserve Banks delivered interest rate cuts only a day apart, there was a significantly bigger gap in sentiment, as demonstrated by RBNZ Governor, Adrian Orr’s 0.50% interest rate cut compared to the 0.25% trim delivered by the RBA.
Setting the backdrop for less restrictive monetary settings was the latest GDP data which showed NZ in a material recession. Additionally, unemployment for the final quarter of 2024 rose further to 5.1%, a four-year high, and consumer and business confidence remain low.
While the cut was widely anticipated by markets, the Committee also provided specific forward guidance on further rate cuts (under the caveat that things continue to unfold as expected). To that end, the RBNZ anticipates easing monetary policy by a further 0.25% at both their March and April meetings to boost domestic demand.
The RBNZ’s predetermined interest rate path marked a point of difference to other advanced central banks, who have remained data-dependent even as the disinflation journey is well under way. Continuation of the wait-and-see strategy has been attributed to an increase in uncertainty surrounding the global environment.
While New Zealand is not immune to these uncertainties (the RBNZ’s February Monetary Policy Statements referenced uncertainty 70 times), the impact on the nation is less clear than that on larger economies, given our size and proximity to the feather-ruffling US.
Whether NZ will escape the attention of the US Administration’s tariff spree is yet to be determined. On the one hand, NZ’s trade surplus against the US works against us, however as a trading partner, NZ sits quite far down the list (50th in fact). So, the impact of any changes to trade policies on the Kiwi economy is very unclear.
Europe’s Powerhouse Woes
Uncertainty of a different kind was also palpable in Europe as Germany’s governing coalition broke down. Discontent around the state of the economy was front of mind with Germany (Europe’s biggest economy) experiencing a second full year of contracted growth as GDP came in at -0.2% for 2024, following -0.3% a year earlier.
Frustrations were reflected in the election results, which punished the current leadership and highlighted the disparity among the country’s voters with both far right and left parties gaining momentum. The change comes as the European Union’s second largest economy, France, is also experiencing a slowdown, contracting 0.1% in Q4 from 3 months earlier.