Why New Zealand is beating Australia in the race that no-one wants to win | WATCH

PHOTO: New Zealand usually beats us in rugby and could also be winning the race towards a sharp economic downturn.(Reuters: Agustin Marcarian)

It takes around three hours and 10 minutes to cross the Ditch — the 2,225 kilometre stretch of the Tasman Sea that separates Sydney and Wellington.

But when it comes to interest rate policy, the distance between the two cities has been growing ever wider for the past year.

Where Australia is delicately attempting to navigate what RBA kahuna Phil Lowe describes as “the narrow path to a soft landing”, his Kiwi counterpart Adrian Orr appears hell-bent on sending his economy into a tailspin and a fiery crash.

The stark difference in battle tactics in the war against inflation between Martin Place and The Terrace was on full display last week.

While the Reserve Bank of Australia called a halt in rate hikes — leaving the cash rate at 3.6 per cent — the Kiwis doubled down, literally, with a double rate hike of 0.5 percentage points to 5.25 per cent.

New Zealand was one of the first central banks to begin raising interest rates when the inflation bogey man first made an appearance.

Despite engineering a dramatic property market slump — values are off 20 per cent in Wellington — it has refused to back off. As far back as last November, it set the controls for an economic crash: predicting a recession in the second half of this year.

That goal looks like arriving early. A few weeks back, the December quarter GDP numbers revealed an unexpected contraction of 0.6 per cent, way worse than the anticipated 0.7 per cent growth. Another downturn in the March quarter will see New Zealand become a global leader for all the wrong reasons.

On this side of the Tasman, meanwhile, there is a growing consensus that our interest rates have peaked — at least for a while.

Much will depend upon the next set of inflation numbers — the March quarter results, due in a fortnight. But, if recent trends are any indication, there should be a further decline in the speed of price rises. If so, that will allow the RBA to hold tight for a little while longer.

Why the sudden outburst of empathy?

Money markets last week pencilled in a 100 per cent chance of a hold on Australian interest rates — a dead certainty. So, the decision didn’t come as a surprise.

The shock, however, was in the statement accompanying the decision. After almost a year of doggedly pursuing the quickest rate hiking program in history — and damn the consequences — the April statement was notable for the sudden reversal of rhetoric.

Where previously the statement contained declarations about the relentless determination to stifle inflation, this one had a far more humane tone.

Rents and power prices were rising at their fastest pace in years, it noted, and “while some households have substantial buffers, others are experiencing a painful squeeze on their finances”.

This was the first time the RBA acknowledged the pain it was inflicting on the nation, most of which has been borne by younger Australians who either are renting or have recently become first-home buyers.

Before you mistakenly believe the RBA has gone soft — or that the governor is belatedly reacting to the stream of negative press he copped for urging youngsters to take out mortgages during the pandemic — think again.

Rather, the RBA is well aware the nation’s economy is on a knife edge.

While we may not have raised rates as high as other countries, Australian interest rate hikes are far more potent than almost anywhere else.

Why are we so sensitive?

At 3.6 per cent, the Australian cash rate sits well below that of many other developed countries, including our Kiwi cousins. In fact, New Zealand is vying for rates race leader with its latest supersized hike.

And yet, as the below graph shows, the mortgage rises faced by Australians have been amongst the fastest in the world.

Why? Because our home loans overwhelmingly are set at variable rates. Even our fixed rate loans are for relatively short terms.

In New Zealand, most home loans are set at fixed rates for a long time. In the US, they’re mostly fixed for the entire term of the loan, often 30 years. That’s why it isn’t even on this comparison graph.

What that means is that interest rate decisions have a far greater impact on household spending here than just about anywhere else in the world. That’s important because household spending is the biggest component in measuring economic growth.

And there’s another crucial element. For a brief time during the pandemic, there was a rush for dirt cheap, fixed rate home loans.

According to research from David Bassanese, of BetaShares, the Australian curve in the graph above will steepen much further as those loans roll off into much more expensive variable rate home loans this year, adding the equivalent of five rate hikes.

Around 880,000 households will see their monthly mortgage repayments double and, in some cases, treble.

As long as we beat New Zealand

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