Um, what just happened in New Zealand?

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.

20:47There is talk of the RBNZ on the offer at .7525 and some talk of them checking rates here.

Wow. That a real deal. Will the KIWI running down another 50-100pips?

edge - what are the deposit rates like in NZ? If they are any higher than the Japanese or other carry source lending rates (or even close), it would make sense for your own banks to borrow offshore against their deposits and lend into your economy. Does NZ have a reserve requirement? Just checked my handiest list, but didn't see NZ on it... http://en.wikipedia.org/wiki/Reserve_requirement
FWIW, I would think that the main aim of the NZ move is to let folks know that they are going to start forcing volatility into the equation (buying and selling when appropriate, so in the long run at very low cost). The CB's have a lot more experience behind them re. floating exchange rates than they did 15 years ago, plus they are more willing to cooperate among themselves to save their "club"...

I think a few of you understand where I'm coming from, I speak from personal experience. Consumer lending has never been higher in NZ yet interest rates are relatively high,deposit rates are good 6-7% and possibly higher but Kiwi's are bad savers. An unemployed bankrupt can find a finance company to lend him money to buy a car in this country.The more money pouring in (from Japanese savers) the more our consumers spend.
I'm showing my age but when I first went to buy a house and raise a mortgage through my bank, they made you jump through more flaming hoops than a circus lion, now on the other hand provided your breathing you're in!
I know this is ground level economics but I think I've got most of it right.

Really nice piece of info from BOE website. Read it, will clear some things.

http://www.bankofengland.co.uk/educa...es/bullet8.gif Spending and saving decisions
A change in the cost of borrowing affects spending decisions. Interest rates will affect the attractiveness of spending today relative to spending tomorrow. An increase in interest rates will make saving more attractive and borrowing less so. This will tend to reduce current spending, by both consumers and firms.That includes spending by consumers in the shops and spending by firms on new equipment, ie investment. Conversely, a reduction in interest rates will tend to increase spending by consumers and firms.

http://www.bankofengland.co.uk/educa...es/bullet8.gif Cash flow
A change in interest rates will affect consumers' and firms' cash flow, ie the amount of cash they have available. For savers, a rise in interest rates will increase the money received from interest-bearing bank and building society deposits. But it will also mean higher interest payments for people and firms with loans - debtors - who are being charged variable interest rates (as opposed to fixed rates which do not change). These include many households with mortgages on their homes. These fluctuations in cash flow are likely to affect spending. Lower interest rates will have the opposite effects on savers and borrowers.

http://www.bankofengland.co.uk/educa...es/bullet8.gif Asset prices
A change in interest rates affects the value of certain assets, such as house and share prices. Higher interest rates increase the return on savings in banks and building societies. This might encourage savers to invest less of their money in alternatives, such as property and company shares. Any fall in demand for these assets is likely to reduce their prices. This reduces the wealth of individuals holding these assets, which, in turn, might influence their willingness to spend. Again, lower interest rates have the opposite effect, ie they tend to increase asset prices.

http://www.bankofengland.co.uk/educa...es/bullet8.gif Exchange rates
A particular influence on prices comes through the exchange rate. A rise in interest rates relative to those in other countries will tend to result in an increase in the amount of funds flowing into the UK, as investors are attracted to the higher sterling rates of interest. This will tend to result in an appreciation of the exchange rate against other currencies. In practice, the exchange rate will be influenced both by expectations about future interest rates and any unexpected changes in interest rates. That is because if investors expect interest rates to rise, they may increase the amount they invest in a currency before interest rates actually rise. So there is never a simple relationship between changes in interest rates and exchange rates.
Other things being equal, an increase in the value of the pound will reduce the price of imports and, because many imported goods are included in the CPI, this will have a direct influence on inflation. In addition, a higher pound will tend to reduce the demand abroad for UK goods and services. Any fall in export demand will, in turn, reduce output, as will any shift of domestic spending to imported goods. A reduction in interest rates will tend to have the opposite effects.

Have to be breathing? That's strict, compared to here But it's hard to see what the gov't can really do; raising reserve requirements is often a first step (in sense, forcing banks to up diligence).

An interesting article for youabout last monday...

http://www.nzherald.co.nz/section/3/...ectid=10446097


A

There are good reasons for the climbing NZ dollar, interest & inflation driven by out of control goverment spending and bad debt are but a few. The goverment intervention in the curreny rate is effectively trying to put a band aid on a decapitation. This will only get worse as goverment spending esculates ahead of the comming election, the NZ economy will pay the price for short sighted populist politics, it's only a matter of time.

Too right mate. I hope a lot of things change with said election...

As do I, we can only play 'wheel out the scapegoat' for so long.
It's a shame because NZ is a beautiful country, but it's being wrecked by what I can only describe as a 'liberal malaise', we outlaw pies in schools & smacking kids, but when a child is literally beaten to death (as happened this week) there is not a politician in site.

and we're up again. i guess rbnz intervention didn't have the impact it was meant to.
we'll see.

It's interesting that it still moves up inspite of threats of more intervention.

Heres another story from the NZ Herald saying the RBNZ wont fight the market/trend.
http://www.nzherald.co.nz/section/3/...ectid=10446082
and
http://www.nzherald.co.nz/section/3/...ectid=10446081

from what i read, it doesn't mean bets are off, but rather off until an opportune time. IF they really want to intervene, because right now i'm not convinced of the real reasons for last week intervention.

this is the end of the article, the guy has been rather evasive all the time... and then of course RBNZ didn't comment on anything he said.

"The bank would intervene at opportune times, not when the currency's direction is being dominated by strong international trends or consensus opinions".

and more important,

"A more significant objective may have been to create some uncertainty in a market where there are some other high yield opportunities available," said Rothfield. This at the margin may discourage some of the funds going into New Zealand."

thanks for the links!

Yes it was interesting. Ah the games we play.

: ) Thom

Seems they have done it again at the open Today and shaved off about 40 points. I just went short, I figure if the bulls feel their is going to be a Central Bank ceiling on the currency they are going to get tired of it and just sell off.

gaps usually fill, Rosco. are you going to average down?

The New Zeland Reserve Bank tightens monetary policy by knocking off a few sheep from a few farms in NZ.

If NZ doesnt have sheep....what else will they have!!!

Rugby??

Not a gap:

http://img340.imageshack.us/img340/2849/nzdfg2.jpg

interesting. the price went back up though, friday's high was 0.7549 and now current price is 0.7526.

p.s. i looked into my oanda account, looks like a gap to me.