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Central Bankers’ confidence dilemma

Inflation is surging in both Australia and New Zealand. That is putting pressure on central banks to hike interest rates to slow the economy and curb inflation. But both the RBNZ and the RBA highlighted waning consumer confidence at their April meeting. While confidence isn’t particularly weak in Australia, it has slumped to record-low in New Zealand.  The details of both consumer confidence reports highlight high inflation as a significant drag on sentiment. With inflation at around 7% in New Zealand but closer to 4% in Australia, that explains why the hit to confidence has been larger in New Zealand. However, we don’t expect the weakness in confidence to derail the recovery in consumption. The household savings rate in Australia remains well above pre-virus levels and retail sales kept rising throughout the first two months of the year. As such, central banks are still likely to prioritise the fight against inflation and opt for aggressive rate hikes.

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