The Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) both play crucial roles in managing their respective economies. However, their objectives and approaches differ significantly, shaping the economic outcomes in each country. Post-COVID, these differences have been starkly highlighted, with Australia’s economy faring much better than New Zealand’s. One of the most controversial aspects of New Zealand’s recovery has been the perception that the RBNZ engineered a recession to control inflation.
Objectives: Prosperity vs Stability
One of the RBA’s explicit mandates is the economic prosperity and welfare of the Australian people. This objective allows the RBA to take a balanced approach, prioritising both price stability and economic growth. After COVID-19, the RBA allowed inflation to remain elevated for a longer period, choosing not to aggressively hike interest rates. This decision was grounded in the belief that safeguarding economic activity and employment was worth the temporary pain of higher inflation.
In contrast, the RBNZ has a narrower focus. One of its primary objectives is price stability, which often comes at the expense of broader economic prosperity. To combat inflation, the RBNZ has adopted a highly aggressive tightening strategy, deliberately slowing the economy to bring prices under control. This approach has effectively engineered a recession, sacrificing growth and employment in the short term to achieve long-term price stability.
Different Approaches, Different Outcomes
Inflation Management
The RBA adopted a “wait and see” approach during the inflationary period following COVID. Rather than stifling demand with steep rate hikes, it allowed inflation to moderate organically as supply chains recovered and global conditions improved. While inflation has remained higher for longer in Australia, this strategy minimised disruptions to the broader economy.
The RBNZ, however, took swift and decisive action to bring inflation back within its target range. By rapidly increasing the Official Cash Rate (OCR), the RBNZ deliberately slowed economic activity. This strategy, while effective in curbing inflation, has come at a high cost: a shrinking economy, reduced consumer spending, and significant pressure on households and businesses.
Employment and Economic Growth
Australia’s labour market has remained robust, with unemployment at historically low levels. Businesses have had the confidence to invest and expand, supported by the RBA’s pro-growth stance. This has contributed to Australia’s strong post-COVID recovery, making it an attractive destination for workers and businesses alike.
In New Zealand, however, the RBNZ’s recession-engineering approach has led to slower growth and weaker employment opportunities. Rising interest rates have dampened investment and caused job market uncertainty. While the RBNZ’s focus on price stability may eventually yield results, the immediate impact has been painful for many New Zealanders.
A Question of Priorities
The disparity between the two economies ultimately boils down to differing priorities. The RBA’s commitment to prosperity has given it the flexibility to support growth, even at the cost of temporarily higher inflation. The RBNZ’s singular focus on price stability, including its willingness to engineer a recession, has limited its ability to consider the broader economic picture.
The Bigger Picture
The differing approaches of the RBA and RBNZ have raised questions about what central banks should prioritise. Is price stability enough if it comes at the expense of economic growth and prosperity? Should central banks aim for a more balanced mandate that includes the well-being of their citizens?
New Zealand could benefit from a broader discussion on the role of its central bank. While price stability is important, the prosperity of the nation should not be overlooked. A balanced approach, as seen in Australia, might offer a more sustainable path forward, especially in challenging times like these.
The RBNZ’s engineered recession highlights the risks of a narrow focus on inflation control at all costs. While New Zealand’s central bank prioritises price stability, it has done so by sacrificing short-term economic prosperity. In contrast, the RBA’s balanced mandate has allowed Australia to emerge from the pandemic with stronger growth, a resilient labour market, and a brighter outlook.
The lessons for New Zealand are clear: a broader mandate that values economic prosperity alongside price stability could help ensure the country not only weathers challenges like inflation but thrives in the long run.
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