By Alex Tarrant
Prime Minister John Key is set to meet outgoing Bank of England Governor Mervyn King next month, and the topic of quantitative easing (QE) may be on the agenda.
Key is also set to meet British Prime Minister David Cameron and German Chancellor Angela Merkel to talk about the European sovereign debt crisis. He said it would be fascinating to get their perspectives on the crisis.
“I think it’ll be interesting to get everybody’s perspective on Europe: What might happen, where they see the Greek/Spanish situation playing out, what stress they see on their economy," Key told his post-Cabinet press conference on Monday afternoon.
The Bank of England's QE programme may be on the agenda, although that programme was not as large as the US Federal Reserve's programme.
"Last time I went to the United States, we had a much more extensive discussion about quantitative easing obviously with [US Fed chairman] Ben Bernanke and [US Treasury Secretary] Timothy Geithner," Key said.
"We might have a discussion with Mervyn King about it, but the UK aren’t really engaging in quantitative easing – not in the way that the United States is," he said.
The Bank of England announced earlier this year it would expand its QE programme, which it began in 2009, by 50 billion pounds to 325 billion pounds. See more on the BoE's QE programme on its website here.
NZ dollar driven up
Key, and Finance Minister Bill English, have both previously expressed their concerns to Bernanke about the effect the Fed's QE - where a central bank buys assets like government bonds from private institutions with newly created electronic money - on New Zealand's currency.
The idea behind QE is to inject new money into the economy by purchasing the assets of institutions like banks, which are then expected to lend that new money into the economy. Assets are generally government bonds, although include mortgage-backed securities and bonds of private financial institutions.
However, many institutions have chosen instead to build up capital reserves with the new money, and many have looked to invest it overseas in higher yielding assets than in the US, where base interest rates are zero. This is dubbed the 'carry trade'.
This has devalued the US dollar, pushing the New Zealand dollar up as US dollars are converted into NZ dollars for investment in assets here.
The higher currency has been the bugbear of exporters and Reserve Bank Governor Alan Bollard, who has noted quantitative easing carried out by major economies around the world - effectively competitive currency devaluation - has put upward pressure on the New Zealand dollar.
The Fed has carried out two rounds of QE. The first, in 2008, began with US$600 billion of asset purchases, which was increased to US$1.8 trillion in March 2009. The second round, started in 2010, included US$900 billion of purchases.
Markets are constantly watching for signs the Fed may embark on a third round if the US economy does not recover as well as the Fed wants. The Fed replaced its QE programme with 'operation twist' in September 2011, where it began to buy longer-term Treasury notes in a bid to drive down long-term interest rates.
(Updates with video of Finance Minister Bill English)