As Prime Minister Jacinda Ardern prepares to fly to Sydney on Wednesday, the Reserve Bank of Australia delivered a reminder of the Covid-induced cost of living crunch back in New Zealand, lifting Australia’s official cash rate target by half a basis point to 1.35%.

• Jacinda Ardern continues her tour of Australia, promoting tourism and trade today.
• Australia’s Treasurer warns that inflation will get worse before it gets better.
• PM pushes back against suggestions the country should move to ‘red’ traffic light setting.

Ardern said on Monday that she expected the scourge of inflation to be widely discussed on this trip. Australian Treasurer Jim Chalmers greeted the news of rate rises with a warning: don’t expect things to improve quickly.

“While the trajectory of rising interest rates was set before the election, this rate rise is another blow to workers and families already under significant cost of living pressure,” Chalmers said.

Australia’s inflation grew by 2.1% in the first three months of the year, higher than New Zealand’s growth in the past quarter of 1.8%. And Chalmers thinks the cost of living will rise further still in Australia.

“When it comes to inflation, we expect it to get worse before it gets better, and the Reserve Bank has flagged further rate rises,” Chalmers said.

In comparison, Finance Minister Grant Robertson has leaned on Treasury and other forecasts of falling inflation in New Zealand.

Meanwhile, Ardern fielded a series of questions about both New Zealand’s immigration settings and Covid-19 as back in New Zealand Covid cases crept up towards the 10,000 mark.

Ardern will complete the trade-heavy part of her trip to Australia on Wednesday , giving a short speech at an unusual joint New Zealand-Australia tourism event and a New Zealand food and products launch at David Jones’ original flagship store in central Sydney.

Called “Discover New” campaign, New Zealand wares will take up a whole floor at the Sydney department store.

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But inflation and Covid have never been far away on this trip – whether it's shuttered up shops in Australian capitals, the continued fear of inflation or even of the daily Covid numbers.

Ardern was firm in her Government’s view that, even with the hike in case numbers, the ‘red’ traffic light setting was not required.

“We have no expectation at this stage. We’ve recently done a review and decided to stay in the settings that we had,” Ardern said while taking questions from media after meeting Victorian Premier Daniel Andrews.

“The question here is, would gathering limits right now make a marked difference to the case rates that we have? There is a real question mark over that,” she said.

The Government is hesitant to move back to red on public health grounds, but also because it would risk driving the economy further towards a recession, further placing pressure on businesses already struggling with an uptick in Covid cases.

The NZIER Quarterly Survey of Business Opinion on Tuesday showed business confidence at its lowest level since the onset of the pandemic in March 2020. ANZ bank economists warned that it was not a good sign for the economy.

“For broader economic momentum, it seems the only way from here is down. That’s not to say the economic fundamentals have suddenly broken; rather, the economy is running out of resource to grow,” they said.

The Reserve Bank of Australia’s decision to push up its cash rate target still leaves the Australian rate lower than New Zealand’s at 2%. New Zealand’s rate is widely expected to be pushed up to 2.5% when the Reserve Bank’s Monetary Policy Committee meets next week.