Monday, June 11, 2007

Reserve Bank takes drastic action

Reserve Bank Governor Alan Bollard is supposed to keep inflation bretween 1- 3 percent over the medium term. He does this by rising the official cash rate (OCR). And he has kept within the target range - just. Inflation is currently at 2.98 per cent over the medium term. But if it goes up again Bollard hasn't done his job unless he sees a dramatic reduction in inflation in the short run.. So he cant raise the OCR again and risk another inflation rise, when we have the highest interest rates in the OECD as it is.

Well, actually, he could, but he`d be very naughty.

His problem is that his OCR rises haven't stemmed aggregate demand, they`ve fuelled it. Despite people find it harder to pay a mortgage in the short term if they are not on a fixed mortgage, we spend too much. And Bollard makes us spend more if we have floating mortgages. But a bigger problem is that overseas investors are investing too much as well, and this affects our rising exchange rate and our exporters. Overseas investors are taking advantage of the rising exchange rate by snapping up NZ dollars. This forces the exchange rate up even more, meaning our export dollar lowers even more and does nothing for our current account. As our exchange rate rises again, Asians find it is even cheaper to invade and invest here and so on...

I blame the Asians. I think Deborah Coddington would too. After all they invested here to start with, bought our dollars and houses, had lots of tax-payer-funded abortions, apparently, rented the houses out as investment, sold them without paying capital gains tax, took off and bought NZ dollars to bump up our exchange rate and made it even cheaper to invest here. They then bought up real estate. Guess what they did next?

Well they didn't sell. So Bollard lifted the OCR. Bang! went half the country's expected KiwiSaver savings. Consequently (not subsequently), the dollar hit a 20 year high - nearly twice what it was in 2000 when it was about 0.40c to the $US.

What to do? Get money out of the country as fast as you can, that's what. So today, that's exactly what the Reserve Bank did. Some Asians were still into state-funded birth control but many more weren't selling their houses and taking their money with them so the Govt decided to hock off some of the $3.5 billion in reserves to bump up the value of our dollar. It was a risk. Not sure how many reserves went offshore but it was a real big risk. But it appears to have worked as the exchange rate has dropped. Lets see how well it works in the long run, ow ill the Chinese now invest some of their $1b that goes off shore every day (to drop its own currency value) in the NZ dollar to wipe out the drop in our dollar.

Now, lets do something about those interest rates - and replace Cullen with Phil Goff. And do it well before Labour loses the election and National slashes Govt spending to pay for tax cuts and the incomes of an increasing number of unemployment beneficiaries.

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