New Zealand's Reserve Bank (RBNZ) has raised interest rates by a hefty 50 basis points to 1.5 per cent on Wednesday, a level not seen since June 2019.
In comparison, Australia's cash rate target is much lower and has been sitting at a record low 0.1 per cent since November 2020. Australia's Reserve Bank (RBA) says it wants to see wages rise at a much faster pace before it lifts rates.
However, many economists are betting the RBA will have no choice but to start its rate-hiking cycle in June, shortly after the federal election.
In the United States, the latest official data showed that consumer inflation hit a fresh 40-year high, reinforcing expectations that the Federal Reserve will lift interest rates sharply next month.
Meanwhile, Australian consumers are feeling increasingly gloomy as interest rates, the rising cost of living, Russia's invasion of Ukraine, petrol prices and floods weighed on their minds, according to the latest report by Westpac and the Melbourne Institute.
The Australian dollar was slightly weaker at 74.5 US cents, by 4:15pm AEST.
ASX receives mining and energy boost
Surging commodity prices boosted the Australian share market, as crude oil prices climbed back above $US100 a barrel on easing lockdowns in Shanghai.
The ASX 200 index closed 0.3 per cent higher at 7,479 points.
The market was driven higher by shares of mining and energy heavyweights including Rio Tinto (+2pc), Origin Energy (+1.2pc), Santos (+1.3pc), Fortescue Metals (+0.8pc).
It also helped that iron ore prices jumped 2.8 per cent to $US154.85 a tonne.
Shares in EML Payments jumped 10.5 per cent (to $2.94), making it the best performer.
That was after EML confirmed it had potential takeover discussions with US-based private equity firm Bain Capital earlier this year.
EML, however, added that the discussions have now ceased.
New Zealand's largest rate hike in 22 years
The RBNZ's latest rate hike (an increase of 50 basis points) was higher than what many economists had expected.
It also marked the fourth consecutive month that New Zealand had lifted borrowing costs as it seeks to contain a sharp rise in the nation's cost of living.
"A larger move now also provides more policy flexibility ahead in light of the highly uncertain global economic environment," the RBNZ said in a statement explaining why it approved such a big rate increase.
In fact, it was New Zealand's biggest rate hike since May 2000.
The minutes of the RBNZ meeting said the board members agreed that their policy "path of least regret" is to increase the cash rate by more now, rather than later.
The purpose of this was to head off rising inflation expectations and minimise any unnecessary volatility in output, interest rates, and the exchange rate in the future.
'One rate hike at every meeting' for NZ
The RBNZ expects annual inflation to peak around 7 per cent in the first half of this year, well above its 1-3 per cent target, underlining the urgency to temper price-setting behaviour.
New Zealand's central bank is expected to keep lifting rates aggressively this year.
"The [Reserve] Bank’s February forecast showed the Bank hiking rates to 2.25 per cent by the end of this year," said Ben Udy, Capital Economics' Australian and New Zealand economist.
"But as inflationary pressures continue to build the Bank faces increasing pressure to act."
Mr Udy anticipates New Zealand will announce six more rate hikes in 2022.
"That would mark one hike at every meeting along with another 50 basis point hike in May. That would take rates to 3 per cent by the end of this year."
Against the kiwi currency, the Australian dollar rose 0.4 per cent to $NZ1.09.
Oil prices 'vulnerable to a major shock'
On oil markets, Brent crude futures jumped 6.6 per cent to $US104.93 a barrel, while US West Texas Intermediate surged 6.7 per cent to $US100.60.
Both oil benchmarks fell sharply (by around 4 per cent) earlier this week.
The rebound came after Shanghai said more than 7,000 residential units had been classified as lower-risk areas after reporting no new infections for 14 days. Districts have been announcing which compounds can be opened up.
Oil prices were also boosted by supply worries, after the Organization of the Petroleum Exporting Countries (OPEC) warned that it would be impossible to replace potential supply losses from Russia.
OPEC lowered its Russian liquids production forecast by 530,000 barrels per day (bpd) for 2022, but also cut its forecast for growth in world oil demand, citing the impact of Russia's invasion of Ukraine, soaring crude prices and resurgence of the pandemic in China.
"The oil market is still vulnerable to a major shock if Russian energy is sanctioned, and that risk remains on the table," wrote Edward Moya, a senior market analyst with OANDA.
The European Union has yet to embargo Russian oil, but some foreign ministers have said the option is on the table.
Confidence drops to pandemic-lows
Consumer sentiment has dropped for its fifth straight month as rising inflation and the risk of higher interest rates weighed on family finances and spending intentions.
Consumer sentiment, dipped 0.9 per cent in April (compared to the previous month), on top of the steep 4.2 per cent drop in March. This was according to the latest monthly consumer survey by Westpac and the Melbourne Institute — a closely-watched indicator of future economic conditions.
Looking further back, consumer sentiment has plummeted by 19.6 per cent from April last year, and almost back to where it was pre-pandemic.
Currently, the confidence score is sitting at 95.8 points. Any result less than 100 means the number of pessimists outweighs the optimists.
The survey suggested the government's Federal Budget in March had a limited impact on the national mood, even though it contained pre-election tax breaks and cuts to fuel excise.
Widespread flooding across the east coast also had some effect on sentiment.
"There is further evidence that interest rates, inflation and weather continued to unnerve consumers in the current survey," said Westpac chief economist Bill Evans.
He noted sentiment among people with a home loan fell a steep 9.2 per cent in April amid speculation the Reserve Bank of Australia (RBA) could raise interest rates as early as June.
Wall Street rally loses steam
Although Wall Street began its day higher, investor sentiment turned negative in afternoon trade.
This was shortly after US Federal Reserve governor Lael Brainard made some remarks about the central bank needing to "expeditiously" grapple with decades-high inflation.
Overnight, the S&P 500 closed 0.3 per cent lower at 4,398 points.
The Nasdaq Composite fell 0.3 per cent to 13,372, while the Dow Jones Industrial Average dropped 0.3 per cent to 34,220."
It was the third straight day of declines for the S&P and Nasdaq indexes.
The comments coming out from Fed officials have been more hawkish than the markets have anticipated," said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago.
"[Brainard] has generally been nondescript, but now she’s more forceful in her commentary, and that’s getting people to sit up and take notice."
Aggressive rate hikes to tame inflation
US consumer prices jumped 8.5 per cent compared to a year ago, according to the Labor Department's figures for March. It was the fastest rise in the cost of living since December 1981.
Russia's war against Ukraine boosted the cost of petrol to record highs, cementing the case for an aggressive 50 basis point (0.5 per cent) interest rate hike from the US Federal Reserve next month.
The Fed will conduct a series of interest rate hikes and begin reducing its massive bond holdings as soon as June to help bring down inflation, Ms Brainard said on Tuesday (local time).
Getting inflation back down toward the Fed's 2 per cent goal is the central bank's "most important task," the Fed governor told the Wall Street Journal in an interview.
"In terms of exactly what the right pace of that set of increases in the policy rate [is] from meeting to meeting, I don't really want to focus on that," Ms Brainard said.
Several of her fellow policymakers, including Fed chair Jerome Powell, have signalled they may need to jack up interest rates by bigger-than-usual increments to get policy more quickly to a neutral rate of about 2.4 per cent so borrowing costs will at least no longer be stimulating growth.
The Fed raised rates last month to a target range (0.25 to 0.5 per cent), its first increase in three years, and said more rate hikes were ahead.
ABC/Reuters
