Time will tell if NZ’s aggressive rate hikes work best

Australians and New Zealanders are being asked to swallow different doses of medicine when it comes to interest rates and only time will tell which is the most effective.

Double-blind trials are supposed to be the gold standard for testing the efficacy – and safety – of medicines, including most recently the Covid vaccines.

We’ll leave aside the not exactly insignificant question of whether they in fact succeeded in doing that with Covid.

The trials were supposed to have proved vaccines mostly prevented infection and were 100 per cent effective in preventing death.

Well, hmm.

But, this method of analysis is supposed to be the ‘best’ we – or Big Pharma – have.

So it’s fascinating to note that with monetary policy – raising interest rates to kill inflation – we’ve got a form of ‘Double (not exactly blind) Trial’ taking place across the Tasman. It was captured in the very different policy decisions by the two Reserve Banks this week. Our RBA paused, the RBNZ did yet another 50-pointer – what our overly-hysterical media calls a double rate hike.

Further, NZ went to 5.25 per cent – way, way higher than our RBA’s 3.6 per cent.

This is despite the fact that NZ actually had slightly lower inflation in 2022 – 7.2 per cent to our 7.8 per cent.

Broadly, bluntly, RBNZ governor Adrian Orr had made clear the RBNZ will hike and hike again until it crushes inflation. Even at the cost to the economy and jobs.

Our governor Philip Lowe has embraced a directly different softly-softly approach – he calls it a “narrow path to achieve a soft landing”.

That’s gently, oh so slowly, forcing inflation lower – the RBA aims to only get it down to the top of its mandated (and agreed) 2-3 per cent inflation ceiling by the middle of 2025, fully two-plus years away.

That would be clearly too slow for the RBNZ’s Orr. And so we’ve got this ‘Trans-Tasman Double Trial’.

RBNZ governor Adrian Orr: Picture: Birgit Krippner/Bloomberg

It’s not a ‘Blind’ trial.

In medicine, no-one knows which group is getting the medicine and which the placebo.

In this we know who’s getting the – full-on – medicine: NZ.

It’s not simply had “11 rate rises in a row’’ – to use the fatuously inane terminology of the media and far too many so-called experts.

But it’s had eight 50-pointers in a row, including in there one 75-pointer - presumably what the media would call a ‘triple-sized hike’.

So, we in contrast, are getting the rate-hiking placebo so to speak.

Again, it’s not simply that our Governor Lowe had a pause this week; but the pause came after he had switched to milder 25-pointers last October.

So, since September our RBA has only hiked by 1.25 per cent; in sharp contrast the RBNZ has gone up 2.25 per cent.

Again, RBNZ has done it into an economy which shows much more signs of buckling under the rate hike than ours – after all, they don’t have our CO2-pumping resources windfall.

It will be fascinating to see how this plays out.

Will NZ get its inflation down faster? And if so, will it be at greater pain?

Arguably even more important is what happens with second round effects.

Does NZ come out the other side of high-rates faster? Does Lowe’s softly-softly blow up in our faces, meaning even higher rates and for longer?