Well it is a general conception that when the central banks raise interest rates, it is to cool an overheated economy. It is true what bytebodger says that higher interest rates cause the money supply to go down, while interest rates being lower causes the money supply to get pumped in to economy because more people can borrow more and pay a lower monthly payment. But I think in NZD's case, it may be a little different because the way the currency is being propped up by foreign interests. Its not internal economic conditions that needs to be fought its the foreign speculators. NZD interest rates rising up causes the money to look more attractive to foreigners/carry trades, thus regardless of the economic situation, people pour in hundreds of millions of dollars for speculative purposes and raising the currency's value regardless of economic situations in NZD. And with the booming real estate, where does that money get invested into?? And I am pretty sure thats why the banks are so eager to finance people even 100% for real estate acquisitions, because there is just so much money to lend, that even high interest rates which is normally used to cut out lending doesn't work in this scenario. To fight the lending, and to cut the supply of money, the interest rates I too believe needs to be cut, because even though that will cause in the technical sense "more money into the economy", in actuality, all the carry traders pulling out will cause the depreciation in nzd dollars and bring it to more sustainable levels and eventually should normalize with the country's economy. But in the short term doing so, might cause some heavy inflation too, but then again central banks think in terms of years so I believe after a period of inflation, it will slowly normalize the situation.
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