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RBNZ leaves OCR at 2.5%; says high NZ$ acting as a drag on economy; reduces need for further OCR hikes

RBNZ leaves OCR at 2.5%; says high NZ$ acting as a drag on economy; reduces need for further OCR hikes

By Bernard Hickey

The Reserve Bank of New Zealand (RBNZ) has left the Official Cash Rate (OCR) on hold at 2.5% and signaled it may remove its March 10 rate cut if global financial risks recede and the economy continues to recover.

Economists and markets interpreted the comments to mean the OCR would be hiked as much as 50 basis points on September 15 to remove the earthquake 'insurance' cut. The bank may then pause at 3% if the high New Zealand dollar helps the Reserve Bank keep inflation under control, they said.

The central bank fired an obligatory shot across the bows of currency traders, saying the high value of the New Zealand dollar was acting as a drag on the New Zealand economy. But it then appeared to give the high currency it's tacit blessing by saying the NZ dollar's strength may help the bank avoid further rate hikes later in the year after the emergency stimulus was removed.

“If this persists, it is likely to reduce the need for further OCR increases in the short term,” RBNZ Governor Alan Bollard said in a four paragraph statement issued with the OCR announcement.

The statement made no mention about currency intervention and gave no timeframe for when it would increase the OCR.

Bollard said the economy had grown more strongly than expected and the recovery appeared to be getting back on track, supported by strong export prices and cheaper import prices.

“At the same time, however, current fragility in global financial markets, including the uncertainty around the US Government’s debt ceiling, continues to highlight the downside risk to trading partner activity noted in the June statement,” Bollard said.

“Annual headline CPI inflation continues to be above the bank’s 1-3% target bank. However, much of the current spike in inflation has been driven by the October 2010 increase in the rate of GST, and will therefore be temporary,” he said.

“Wage and price setters should focus on underlying inflation, which is currently estimated to be below 2.5%,” he said.

“Provided current global financial risks recede and the economy continues to recover, the Bank sees little need for the March 2011 ‘insurance’ cut to remain in place much longer.”

Markets interpreted this a slight toughening of the bank's rhetoric. Short term wholesale interest rates rose a few basis points and the New Zealand dollar rose to a record high 87.3 USc from 86.8 USc shortly before the announcement.

Economists had not expected the bank to increase the OCR from the record low 2.5%, but relatively strong growth and inflation figures in recent weeks has seen some economists bring forward their forecasts for the first hike in the OCR to September from December. Some economists said there had been a small chance of a hike today.

BNZ says Bollard too cuddly

BNZ Economist Stephen Toplis said in a note titled "RBNZ too cuddly by half" that the bank appeared to be making the same mistakes it made during 2006 and 2007.

"In the last major tightening cycle the Reserve Bank got it horribly wrong because each and every time it raised interest rates to contain inflation it suggested that the hike, at the time, might be enough. In that fashion it failed to change the behaviours of the populace as there was no “fear” that interest rate increases might prove painful. Consequently, both interest rates and the exchange rate ended up higher than needed to be the case," Toplis said.

"Lightening appears to be striking twice. In today’s OCR review the Reserve Bank has given the green light for the removal of the emergency rate cut introduced immediately following the February 22 Christchurch earthquake but has then failed to push through with a stern warning that inflationary pressures are building. In fact the Bank goes so far as to downplay inflationary risks," he said.

The bank had sold its message poorly and signalled it would raise rates 50 basis points in September, although Toplis wondered why the bank was waiting until then.

"More worrying, though, is that the RBNZ goes on to say that the strength of the currency “is likely to reduce the need for further OCR increases in the short term”. We interpret this as meaning the Bank, currently, sees rates on hold at 3.0% until March next year. However, we also note the reference to “short term”. Accordingly, we still think the Bank believes rates will move up to its previously proposed 4.75% in due course." 

ASB brings forward rate hike, but sees pause in October and December

ASB Economist Nick Tuffley moved his rate hike forecast forward to September from December after the announcement. He now sees a 50 bps hike on September 15 to 3% before a pause until January.

"The RBNZ was very specific that further increases in the OCR (i.e. beyond the removal of the 50bp insurance cut) were dependent on the level of the exchange rate (the Trade Weighted Index is likely to be the most appropriate measure to consider)," Tuffley said.

"What is apparent is the RBNZ wants to take back the March 50bp ‘insurance’ cut very soon.  That suggests a September hike is very likely, and in our view a 50bp is more probable than a 25bp.  The RBNZ sees “little need for the March 2011 ‘insurance’ cut to remain in place much longer”, and our interpretation is that means an imminent move and also reversing the March cut in one hit," Tuffley said.

"Beyond that we see the RBNZ pausing until January, then resuming steady 25bp OCR increases.  Further hikes, beyond removing the ‘insurance’ cut’ are conditional on the level of the NZD, ongoing NZ economic recovery, and the fluid global situation.  We expect the NZ dollar will remain elevated, and “likely to reduce the need for further OCR increases in the short term”," he said.

"This means NZ interest rates are going to be trading as if the MCI was still in use.  Furthermore, NZ commodity prices (and the Terms of Trade) are likely to moderate, reducing the income boost to NZ.  These are reasons, we believe, for the RBNZ to pause (after removing the insurance cut) for the rest of the year."

Tuffley said markets had now fully priced in a 25 basis point hike in September.

"Meanwhile, longer-term domestic interest rates declined slightly, given the uncertainty around further OCR increases beyond the 50bp increase by the end of the year," he said.

'Two small hikes and then a pause'

Westpac Chief Economist Dominick Stephens said he now expected two 25 bps hikes in September and October before a pause in December.

"The Reserve Bank today kept the OCR on hold at 2.5%, and issued a rather nuanced interest rate outlook. The upshot is that the RBNZ is planning 50 basis points worth of hikes in the near term, followed by a pause. But the early hike(s) are conditional on the domestic economy continuing to recover (which seems likely), and global financial risks receding (which is less certain)," Stephens said.

"We believe the most likely scenario is two 25bp OCR hikes, one in September and one in October, before a pause in December. A 50bp hike in September is distinctly possible, should global financial concerns about US and European sovereign debt abate. But that’s far from certain at this juncture. Indeed, a significant deterioration in financial market sentiment could yet delay the early hikes altogether," he said.

'Hawkish for September'

JP Morgan economist Ben Jarman described the bank's statement as concise and hawkish.

"We expect the RBNZ to remove the insurance cut in one fell swoop in September, hiking the OCR by 50bps. There is an argument for the RBNZ treading more lightly, perhaps moving with a 25bp hike initially, given that the recovery has been punctuated with disappointments over the last couple of years. But today’s statement sends a fairly clear message that “the March 2011 ‘insurance’ cut” – singular, i.e. the entire 50bps – should be removed," Jarman said.

"NZD has risen 15% since February (i.e. before the “insurance” cut), which is imposing a meaningful tightening of monetary conditions, particularly given that the economy is rebalancing with a greater weighting toward the traded sector. This reduces the required pace of tightening beyond the first 50bps," he said.

"Indeed, the statement today was also quite clear on this point, with elevated NZD “likely to reduce the need for further (i.e. beyond the insurance component, emphasis added) OCR increases in the short term”. We expect the RBNZ to hike the cash rate by 25bps a quarter from 1Q12 to 3Q12, with the OCR ending 2012 at 3.75%."  

'Still stimulatory'

ANZ Chief Economist Cameron Bagrie said he now saw the RBNZ removing their March 10 'insurance' cut of 50 bps at the September 15 meeting.

"We see no point in unwinding the insurance cut in multiple steps. But we think the RBNZ will pause thereafter to assess the landscape," Bagrie said.

"The Governor made it clear that the high NZD is a concern, which will lessen the need for further increases thereafter. The bottom line is that the OCR is set to move off emergency settings but still remain stimulatory."

Here is a summary of the various economists (and my) view on interest rates, house prices and fixing vs floating.

Forecaster First OCR move Peak OCR Fix or float? House prices
RBNZ* December quarter 4.75% by Dec 2013 Prefer you float <2%  pa
ANZ National September 15 by 50 bps 4% by end 2012 Float for now Listless
ASB September 15 by 50 bps 4.5% by Nov 2012 Float for short term 3.5% pa
BNZ September 15 by 50 bps 4.75% by Dec 2012 Fix for 2-3 years n/a
Westpac September 15 by 25 bps 6.0% by Dec 2013 Fix 0% in 2012
HSBC September 15 by 25 bps 4.25% by Dec 2012 n/a n/a
Bernard Hickey December 8 by 25 bps 4.0% by Dec 2012 Float -5%

* Forecasts implied from 90 day bill forecast track in June 9 Monetary Policy statement


(Updated with NZ$ rise and swap rate chart below, ASB economist Nick Tuffley's comments, JP Morgan economist Ben Jarman's comments, Westpac economist Dominick Stephens comments, BNZ economist Stephen Toplis' comments, ANZ's Cameron Bagrie's comments)

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".. if global financial risks recede and the economy continues to recover. " So: He still has 2.5% up his sleeev, if need be :)

Seriously, how could Bollard justify a rate hike given the extreme weakness in credit (debt) growth?

Just look at the RB website.

Credit growth is flat to non exsistant and well below the (reported) GDP and inflation, what possible purpose would be served by raising the OCR with these conditions in place. 

The idea of the OCR is to target inflation caused by excess money from high credit growth. External demand/supply issues, taxes and currency value changes cannot be their focus.


How about reducing the massive debt overhang that NZ has? If we have low credit growth, and inflation... bye bye debt.

As expected, he draged up every excuse that he could find to do nothing until after the election.

The Kiwi $ loves him, up across the board

Yep agreed ,dammed if he does and dammed if he dont.People cant afford to pay any more in rent to the banks, and thats an end to it.

Boy! these are interesting times.When America ups the debt ceiling,and infalates its dollar to monopoly money status,as it has to.Or decides to tax the rich till they "squell like a piggy" many tricks will be left in the magic box?.To much austerity and the poor old worker, will be having a Russian 1917 moment.

Interesting logic: Inflation is already high so we will keep rates low making inflation even higher…

@ Troy, don't fall into hte trap of so many as thinknig the OCR is a powerful tool to curb inflation - it isn't.  All it is is an excuse used by the banks to increase their mortgage rates, nothing more.  If he doesn't increase the OCR the banks will find a reason to increase their rates e.g. higher external loan rates financing.  It's all a con, the bank man will screw you somehow with or without the OCR raise

That might be the case…however there is a direct correlation in OCR increase and the NZD increase. To counter act all the inflation the US is currently exporting around the world the NZD would have to be re-valued at almost 55% to $1.35 USD/NZD just to stay on par.

your comments are also true about the correlation but I don't think it is a real / natural  correlation I think a large part of it nowadays is the banks making it up - an artifically enhanced correlation. rather than using the OCR I reckon a revaluation of the NZ$ anything close to what you say - even another 10-20% - would have a similarly dampening effect on the NZ economy as an OCR increase

But first we would need to agree that it’s even the NZ economy that is heating up or is it just imported inflation? I’m guessing the later.

And some news for beef exporters:


Access to the European Union for New Zealand grain-fed beef

The European Union has agreed to allow New Zealand access to a quota for grain-fed high quality beef, Trade Minister Tim Groser announced today.

“New Zealand has been approved to join a list of countries able to access an annual quota of 20,000 tonnes tariff-free (going up to 45,000 tonnes in 2012), which is administered by the EU.”

“New Zealand has acquired in more recent years a well-deserved reputation for high quality pasture-fed and grain-finished beef. It is important that industry is able to pursue all avenues to access high-value markets and to promote growth in this sector”, Mr Groser said.  

“This additional access is therefore very welcome and will be good news for the sector. Not only does this allow New Zealand to offer a wider product range to European consumers, it indicates that New Zealand can add value to our more traditional beef exports”.

“From my discussions with New Zealand companies it is clear that we can be competitive in the higher-priced high quality area, not just manufacturing beef which traditionally has gone to the North American market. In the long-term, I see a bright future for New Zealand high quality beef production. This agreement, which has taken some time to negotiate, is absolutely a step in the right direction”.

Tim is getting desperate for some good news. Grain feed beef is not something we can do well. World prices dictate the price of grain and then we get to air freight it to Europe and then compete and notice the 45,000 tonnes is spread amongst many, including Brazil?Wouldn't we be better to sell Grass fed, natrural grown hormone and roundup free beef where's the value in the NZ green label.Lets face it most grain crops today get at least a couple of doses of roundup, then we eat the stuff. Its just more bullshit, lets instead turn our attention to Australian lamb exports to the UK, where they have managed to make up the shortfall in our lamb exports because of low numbers due to drought and mis-investment in dairy bordering on insane, now the Aussies want to keep the access.

 This Groser guy is realy starting to worry me, when does he retire how much damage can he do before hand?

Come on AJ, is it really necessary to find the negative in absolutely everything? This is essentially good news, not earth shattering but good none the less. Take a happy pill man!

Always look for the good and the bad, then standing back you have a strategic overview.  You get a) a balanced picture and b) You can after considering the negatives mitigate them or ignore them.  Then you wont be caught on the back foot if one emerges to try and bite you.....I'd rather lose a bit of skin than a pound of flesh everytime.


Not sure the strategy needed for this. One wonders what else they get up to.

Lots of good news shagger of sheep. I see the UK has increased milk production by %5 Ireland by %9, EU i think %6,USA looks to be around the %6 too, compound that.The good news is that farmers in the UK are making less money the more they produce, got to be something in that, you know, the more you produce the lower the price, we on the other hand are low cost producers and are going to make a killing when the price tanks and those Northern Hemishpere guys can't compete anymore. We just got to keep those costs down,and the dollar or is it already too late?

 Look what those droughts did to sheep prices, %30 less sheep and record prices, or was it our marketing skills, I'll go with marketing like the meat board tells me.

even more good news shagger, my pruners tell methat Montana are not pruning in HB , I dont know why but its a big deal, with 100's of acres, it means they dont see a future, if enough grapes come out the ones left may make a living.

Crazy....grass fed is now carbon, its seems NZ can do that very well  and seen as a great product and environmentally aware ppl are prepared to buy and pay more.....but now we talk of grain fed beef?  

there is also the damage to NZ's clean green image, with this we get tar'd with the same brush as the rest and our tottering image is just set to nose dive.....really crazy.



No the talk as you put it was not specifically of grain fed. It said Quality pasture fed OR grain fed. We have some of the best pasture on the planet in Southland and Waikato not to be concerned.

Wouldn't we be better to sell Grass fed, natrural grown hormone and roundup free beef where's the value in the NZ green label.

I think the word we need to adopt is 'Traditional', we can never truely claim to be 100% Pure and will continually be challenged on it , but we can claim a '100% traditionally grown hormone free grass feed' product that can't be disputed. The rest of the Ag exporting world will increasingly use GMOs so long as we don't allow their introduction here, the 'Traditional' tag will gain in value with time...i don't see anything inherently wrong in the use of GMOs but for the small increase in productivity we lose our greatest competitive advantage, 20 to 30 years down the track and GMOs will be passe, no one will give a monkeys..but until then lets keep it 'Tradional'

You dont see anything wrong with use of GMO. So you know 100% any & every impact products from monsanto , du pont & Scotts might have on our primary industry ?
No thought not!

Yes you are right, i have no clue!...So please explain!!

The main use of GMO at present is to allow Monsanto and co to sell more chemicals. They release the seed we get to pour on roundup as a weed control without killing the crop. I didnt have a problem with roundup as weed control but when its sprayed on the crop and i then get to eat it I draw the line. We are far too production orientated, we need to get wise and profit orientated. Producing and doing what everyone else is doing isnt going to be enough.

'Producing and doing what everyone else is doing isnt going to be enough.'

Totally agree...My point exactly, as i stated I'm not infavour of the use of GMOs, the main upshot of this position is our point of difference to our competitors..However there are some examples such as new grasses (and i'm not referring to Roundup ready cultivars) which we could benefit from introducing...But lets not!! 

Tens of millions of public science dollars have been directed to the

development of GM pasture species in New Zealand over the last two


· Two major New Zealand-based programmes are seeking to develop a range

of GM pasture grasses engineered to tolerate drought, increase biomass,

increase water and nitrogen efficiency, and improve the nutritional content

of forage species such as ryegrass and clover

The major issues are about creating dependancies on patent owned products. The question is , can this be prevented & what might turn out to the be the effects on the biosphere from genetically modified anything.
It can't be known , so why would it be tolerated.

Neil I agree with you on the point of difference for Nz to be able to produce with "traditional"'. Will we be allowed to do so remains to be seen!

Roundup ( the Monsanto name for Glyphosate) has been off patent for years, marketing is the only thing keeping Monsanto keep up!

The last time I looked I think g2 was $40 or $50 a litre while the generic was $17....I bought the generic, its just as good.


No surprise there...the reason being both products came out of the same tank imported from the manufacturer in China by the NZ wholesaler, whom is not Monsanto. I stand to be corrected but i am reliably informed Nufarm the NZ distributor of Roundup adds their own surfactants/wetting agent and colour to this generic Glyphosate in Auckland, but to be fair their premium product Roundup Transorb  is superior due solely to advanced sticking agents, which is how Monsanto keeps ahead of the competition 

While GMO is i think absolute crap, (its done little for productivity, it just made some ppl very rich). And yes while I agree with you on the global aspect/damage, (and with suicide hybrids, future risk), within the context of GMO free and green NZ  produce there is a small advantage for us, probably fairly small at present....




 I agree with you Andrew. In addition climate change does not allow to keep production prices down – the opposite. With the current worldwide developments animal welfare will suffer and animal products will be much harder to sell.

Groser- a good, positive, exciting talker - but without much substance considering today’s and tomorrow’s reality.

 Looking into current developments on many fronts – the world will never recover again, simply because among the powerful in societies ethic and moral requirements and standards don’t prevail.

In terms of climate change I think we pay about $2 to $3 a kilo for bananas, I think they are currently $12AU in OZ....because they are not allowed to import?  While such a price spike is contrived/artifical  it gives an idea of where prices can go......and the dangers of NZers being priced out of the shops by richer ppl.


The article did not specifically say "grain fed" it said 'PASTURE' fed OR grain fed.

NZ has many good areas of pasture unlike many arid areas of Australia and some other countries that do not.  You are worrying over nothing. Sure we have droughts in some areas but the pasture in Southland and Waikato is among the best grazing land on the planet.

The whole OCR breathless anticipation of a 0.25% movement woteva  hype is a joke - nobody knows whats around the corner with US and European economies which is what really matters, and our  NZ economy is so small whats the point stressing about it ?

  Its the same short angry men  mentality with the anti-nuclear ships lobby and ETS rorters  - " we will lead the world,we'll tell the US to stick it,we'll tell the farmers to get rid of their farting bovines "

And then we have Hickey & Co conspiracy theorists on the PM and Bollard keeping the dollar high . Thats about as good as the one about the  C130 flight to USA to  rescue a PMs spouse

It is not Bollard keeping the dollar high it is investors that are keeping it high. As the higher interest rate cycle is yet to commence, there is little downside to the dollar until that interest rate cycle peaks. Consequently, all that Bollard could do to lower the $NZ would be to sell $NZ to buy US or other currencies but with impending interest rate rises, international investors and currency traders will continue to push up the $NZ.. Consequently any weaking of the $kiwi via RBNZ intervention would be very short lived and the reserve Bank could loose Millions or even $Billions in the process.

so house prices will keep rising in the medium term???

As usual Bolly is as effective as the resident mouse cut off from the food supply by the resident cat...holding on to the belief he can "do nothing" and out wait the cat...resisting every temptation for fear the error may be an undignified moment of ultimate humility......

Meanwhile the rats and other vermin go about their business unmolested giggling at the cats preoccupation with his timid prey.........

To encapsulate he (Bolly) could have edited his press release down to......Squeak..! as everbody would have understood in keeping with his well documented history.

Squeak up man...! .......Squeak now or forever go on holding your piece.

damned if he does, damned if he doesn't.  putting things in context NZ is a tiny pimple on the butt of the world in economic terms so we are at the mercy of far bigger events / things than we have no power over.

(1) current NZ growth is minimal and barely enough to call growth.  I would want to see much higher levels and over a longer period before any increase - at least 2 more quarters of between 2-5% growth which takes us into Q1 2012

(2) current rates of NZ growth are so small they could easily slip back into negative terrritory, any one of a number of external events could easily do that e.g. US debt crisis, Aust housing market pop, Chinese housing market pop, Greek default, Spain recession, the list of downside risks goes on and on

(3) increased NZ business confidence is a mirage and will be easily spooked - see (1 & 2)

my recommendation - hold the rate through to the end of 2011 and possibly increase it by 50bp early in 2012 if the external economic environment improves.  If he increases now it will be too early and he will be repeating exactly what he did last year when he did those dim-witted increases that stifled the little growth we started to experience Q1/Q2 2010.

However Gareth Morgan admits there's very little the government can do to bring the dollar down, as New Zealand's a victim of the currency extremes in the rest of the world.

Do you believe Gareth Morgan is correct? If so, why?

Les - spin-doctors never answer a question. They ingratiate as far as they can then they throw whatever they're guilty of at their detractors, hoping some of it will stick, and that time will be wasted in the unsticking.

But they never answer a question - it's all rhetoric, put-downs, good-sounding stuff with no substance.

These people don't believe anything - they sold their souls well before the cock crowed thrice.

The only way to deal with them is with a straight bat, honesty and the factual high-ground.

How's winter treating you?

Murray - noted. Winter is going ok, thanks. It's the shakes not the snow that's the worry! Seems to be all quiet on the Eastern Front for now, but too soon to say it's over methinks. Cheers, Les.

Les - if you ever need a change of scenery for a weekend or a week, just holler.

We aint far away.

go well.

Thanks again, I should say, I recall your kind offer just after 22/2. I will do sometime. Have not been down Speights country for a while, so will have to put it in the plan. Last time was some cycle race over a dodgy rail route and recall I got nicely hydrated on the Saturday night, somewhere ...

An interesting series of public debates happened about 2500 years ago between a couple of Athenians. Demosthenes was arguing for truth in rhetoric, whereas Aeschines took the opposite position.


Demosthenes won the exchange, but we are a long way removed from his principles these days.

For me a number of reasons.

The USA wont address its debt issues, the only way left is money printing, this means the US dollar devalues.

The US economy partially due to the above but also due to ther reasons like, a structural unemployment of close to 10%, its raw materials base is all but exhaused, its intrinsic costs, that it cant produce enough of its own oil needs, corruption etc etc will enter a recession / depression decades long from which I dont think it will ever is simply structurally grossly mis-managed and highly in-efficient......So you know one day in 30 or 40 years it might be functional again...maybe, I wouldnt bet on it.   The EU is close to collapse, this to is a basket case, but it will probably recover within 20 years because it  is more efficient and less corrupt.  In any event this is number 2 of the large economic blocks that NZD has to be valued against as they too will effectively print....

So two of our natural economic trading blocks will be too expensive to sell into.

NZ has a commodity base in terms of food and minerals that are our Dollar should stay strong.

China and India, asia etc....I expect these first two to over-heat and significantly so.....they are also inherently unstable societies....and guess what without fossil fuels their population cant be fed.....and they simply cant get enough oil and materials to continue as is, its impossible.....

GM himself seems to be one of the better/brighter economists with a wider viewpoint, he is worth listening to....most of the rest are not....



Can you help Grant out with my questions at 9.50pm, below. Cheers Steven, Les.

Les Rudd


It is not Bollard keeping the dollar high it is International investors and Commodity prices that are keeping it high. As the higher interest rate cycle is yet to commence, there is little downside to the dollar until that interest rate cycle peaks. Consequently, all that Bollard could do to lower the $NZ at the moment would be to sell $NZ to buy US or other currencies but with impending NZ interest rate rises, international investors and currency traders will continue to push up the $NZ.. Consequently any weakening of the $kiwi due to RBNZ intervention would be very short lived and the reserve Bank could lose $Billions in the process. The kiwi will also continue to rise further against the $US until they get their debt under control. If the US resort to PRINTING money again to finance their debt as a year ago, that will further weaken their currency. 

You say, "all that Bollard could do to lower the $NZ at the moment would be to sell $NZ to buy US or other currencies but with impending NZ interest rate rises, international investors and currency traders will continue to push up the $NZ"

But suppose* there were to be no further interest rate increases, in fact RB could reduce the OCR, because instead they facilitate requisite tightening via the ratios mentioned? See my question to Grant. 9.50pm last night. Then consider RB combining this approach with some tactical interventions - how could they lose, they are the ultimate insider. Others have failed with their intervention because they have failed to make their currency unattractive. Have a look on the RB website for a paper by Cassino and Wallis about NZD through the GFC, you'll see what makes the Kiwi attractive, and by definition how to make it unattractive.

Cheers, Les.

* Also suppose NZ gov. grew some and curtailed their spending and implemented taxes as Steven commented - effective property, asset, land and gains taxation.

If the RBNZ were to make the $kiwi deliberatly unattractive to international investors, [God forbid] that could create financial instability resulting in a massive run on the currency and the exact opposite to our currently rising dollar.  The currency would not only weaken, but plunge.  As markets DO NOT thrive on uncertainty or instability, the local stock market would likely follow the downward spiral - vulnerable local companies eventually subject to hostile foreign takeovers.

A plunging currency would create massive foreign exchange losses for international investors, a massive run on the currency, higher borrowing costs to banks resulting in higher mortgage rates and rampant inflation.  Bank Asset Ratios would come under pressure creating instability for the Trading Banks and the NZ economy.  The beginning of a financial meltdown, and In a a worst case scenario, the trading banks may likely need to be propped up . Investor confidence in NZ having been  "spooked: and may not easily return.  Not a chain of events to deliberately set in motion. 

That sounds awful - how soon can we start?

Thanks for the reply and assisting in proving the point by describing the influencing involved.

Can you tell us how the MAS approach works?

What you've outlined appears to be like a propoganderist's (alarmist's) anti-view that illustrates behaviour toward the boundary. If it were managed appropriately, then ...

Can you tell us how the MAS approach works?

Cheers, Les.



Not only alarmist ....AS NZ has a relatively high debt to GDP ratio, NZ markets will be easily spooked by so called printing money.  'Hot money' and 'stop loss' traders will virtually disappear overnight. A classic example was the massive outflow of currency that occurred immediately after the Lange Govt was elected - on rumours of a devaluation. Bear in mind, that as a tiny country, even a hint of a negative rumour can have a massive flow on effect. 

America printed money a year ago. That did not fix its debt problems because they did not address the underlying issues for their over expenditure and budget shortfall. One needs to take the hard decisions or, the markets will punish severely.


I see the 90 day bank bill rate continues to climb... am I right in sayig that Bollard with have to follow this interest rate by raising it at the next announcement?

Given the circumstances, the RB's decision appears quite reasonable. (Some journalists pretending to be economists may disagree of course).

FYI from the NZ Manufacturers and Exporters Association on the RBNZ decision:

Rebalance won’t happen while exchange rate constrains inflation - 28 July

Capital controls rather than the exchange rate must be used to restrain inflation say the New Zealand Manufacturers and Exporters Association (NZMEA).  There are a number of options available to the Reserve Bank to restrict inflationary pressures through capital controls.  These measures do not reduce returns and investment in the tradable sector.

NZMEA Chief Executive John Walley says, “Right now most developed countries are manipulating their currencies downwards in an attempt to spark an export led recovery.  The notion that we would push ours artificially high to restrict inflation when the Government claims to be rebalancing the economy is ridiculous.”

“We need to learn a lesson from Australia.  Their previously strong recovery is being stunted by a restrictively high dollar.  Our currency is not far behind.”

“The Reserve Bank has shown with its introduction of the Core Funding Ratio that the world doesn’t end when a new tool is introduced.  The RBNZ now needs to add a minimum retail deposit funded percentage and a loan to value ratio to this package.”

“All the while the ‘disinterested’ bank economists are talking up interest rates to pump their margins and lift the dollar, lowering their foreign debt exposure.  The real economy is again the whipping boy of problems elsewhere in our economy.”

“We cannot expect exporters to lead an economic recovery when the biggest determinant of their success, the exchange rate, is allowed to be pushed higher and higher.  The Government and the Reserve Bank need to devise a strategy that actually meets New Zealand’s real economic needs.”

Saved me a job Bernard.

I like this bit:

"All the while the ‘disinterested’ bank economists are talking up interest rates to pump their margins and lift the dollar, lowering their foreign debt exposure." 

and this bit:

"The RBNZ now needs to add a minimum retail deposit funded percentage and a loan to value ratio to this package.”

Suggestion - get Geoff Simmons and Gareth Morgan in for a dual-double-shot job to discuss what could be done about NZD overvaluation.

Cheers, Les.



To be fair Les....although I chose a parody...i made much the same point in my 10.28am Bernard has above...laughing in fear....

God help us, you can see the problem for NZ manuafacturing when you have the NZMEA absoluely wasting its time in continually trying to argue that the Govt/RBNZ can permanent impact the level of the NZD - guys wake up, contribute something useful, stop being niaive.

Grant - let's try my questions in a different, more simple form. If RBNZ dropped OCR, and compensated with the ratios mentioned in the NZMEA media release would NZD go up, or go down?

Cheers, Les.


There is some pretty good signs that we could actually attempt to lower the exchange rate with minimal risk to NZ.  So while printing would be high risk if not suicidal there are some things worth trying because they look like they can work but the negative risk/impact is small.

A lvr will keep the housing mortgage market flat and reduce the hot money...banks will be p*ssed but I dont care...let teh RB control it, dropping the 80% to 79% has a similar effect to raising the OCR...ergo we could go to say 77% and drop the OCR to 1.5%....what is the effect of that?  Well the carry trade is now marginal?  Business lending is cheaper? the NZD drops back a bit? is it a perm effect?  I think the answer looks to be yes to all.

Tobin tax will reduce / discourage speculators and hence volitility....

Ive talked to ppl and read/listened to those in here actually exporting and the high exchange rate is bad news.....if we continue to do nothing we are going to suffer for we need to start trying....

CGT and land tax, both these bring in sectors not paying tax or paying very little so with more income other taxes can be reduced....say the business rate dropped a few %....

I dont think there will be any one thing on its own will be enough but several things each doing a little add up.....

Why wont these work? what are the negatives? how big are the negatives?



Printing money may weaken the $NZ but, it will almost certainly result in a downgrade by S&P . As a result, the banks will have to pay a higher interest for foreign finance which will push up interest rates, inflation will rise and investor confidence will be lost.

America printed money a year ago. That did not fix its debt problems because they did not address the underlying issues for their over expenditure and budget shortfall. One needs to take the hard decisions or, the markets will punish severly.

Absolutely this needs to come in, and totally agree with this bit "The RBNZ now needs to add a minimum retail deposit funded percentage and a loan to value ratio to this package".
Hopefully that will move them away from issuing all these covered bonds as well.

Using just interest rates by themselves in the past was never really working, and now they are expecting to try use it with all the billions that's being printed by the US and China and everywhere else.
They're kidding, capital controls at least are needed as well as interest rates, other tax changes will also be needed.
In a world where everything else is changing, doing nothing isn't an option anymore.

An interesting and thought provoking point of view.....Im pretty much convinced a LVR at 80% is essentail. Maybe vary it up and down a bit and have that controlled by the RB is the way to go.....Like to see some counter arguments why not.

Funding above needs raising.....(as in discusing) it seems hard to say no to.

Did I miss a comment on a tobin tax? simply there is masive curreency speculation that, as far as I can see does us no good....and I think where there are specualtors there is damage in a 0.01% tax, something of that order, enough to send the specualtors elsewhere but not effect exporters.



I agree regarding LVR but I'm not sure how it would work for existing loans.  Say someone has a 90% LVR currently and has met all repayments, does this mean theyd have to sell or would they be stuck with their current bank till they paid off 10% even if they could get a much better rate from a different bank?

The LVR would apply at time of taking out the loan only...hence the RB varying it by say +/-2% (instead of the OCR) wouldnt apply to existing loans.

Your second point is a very good one....(right now you can get 95%), but we shouldnt have got to that.  So we need some sort of transistion protocol/policy.....not even changing banks but moving locations possibly would be an issue....if this came in.....First thought is start at 90% and drop it 1 or 2% per year for existing loans but have new ones at 80%.....would that work?  Bearing in mind house prices rise with inflation that should be fine, however if they drop?  not so good....I think its a case of sorry, lump it.   I suppose you cant really think in the micro or individual level, it has to be a NET good for NZ at the macro level...someone, somewhere, somehow is always at a dis-advantage.


 Les/ John – Not only because of the high dollar – time is tough and will be increasingly tougher for exporters anyway.

Why is the NZMEA not more concentrating, building on domestic markets ? Like other countries demonstrate - the most valuable economic factor for success is full and skilful employment.

Please, provide a link/ document where the NZMEA advises/ pushes the government for allocating it’s infrastructure needs to NZmanufacturers/ NZworkforce.


Switzerland is currently struggling with the same fate – high currency, but has a far better balanced manufacturing culture then NZ.

Here you are, link provided Walter: 

However, don't underestimate the need to export to sustain the kind of living standard we enjoy - we are only 4 million and we can only drink so much milk.

Cheers, Les.

Thank you Les. Yes – I was listening a number of times to John Wally on TV – very nice, pleasant person – almost a father figure. As your link suggest the document hasn’t got one shot of whiskey in it – but that’s not what our politicians need.

The NZMEA should demand instant actions from the government to secure infrastructure orders to NZcompanies. The economic/ social environment is changing fast. Now it is time to secure full employment in skilful jobs. This requires a U- turn of governments policies.

The government allocating orders to foreign companies in the billions is a joke considering, especially youth unemployment, the deficit and a one- sided economic performance.


By the way: A solid domestic market, makes business (e.g. supply/ knowledge) much easier for exporters.  Now in difficult times, exporters can even  modify their business structure and participle in the domestic market.

Just talking to a self-employed carpenter..times are tough for them...

Updated with Stephen Toplis' comments that Bollard was being too cuddly and the bank was making its mistakes from 2006 and 2007 all over again.



Updated with Cameron Bagrie's comments.



Bernard, do you think these guys really have a clue?

Which guys?  Persoanlly I think Dr Bollard is spot on, he's walking a tightrope and its a huge drop either side, doesnt help that he can probably only see 30cm economists are no where...


agree - the experts should admit they  simply dont have any idea whats going to happen next- economics is an inexact science


 Justice | 18 Jul 11, 1:12pm



"Watch as Bollard & Co and English completely ignore/play down this obvious reality via leaving the OCR at a near historic low regardless of actual inflation. Bollard & Co only care about one thing, and that is protecting the property bubble they helped create right to the bitter end. And this will end very bitterly indeed"


TOLD YA! Jezz, how long does it take to learn how corrupt the RBNZ is?

Once again we miss the point.

If we've hit the limits to growth, then two conflicting things happen:

One is that interest rates can only be supported closer and closer to zero, then below. Simply put, if the resources aren't there to support exponential expansion, then exponential expansion won't happen, so all forms of usury are off the table, not underwritable.

Simultaneously, the competitive demand for the dwindling resources and the post cherry-picking dross, will increase - in regards to arable land, food and water, this will be 'bidding with their lives'.

So you get runaway inflation, but no ability for the rate, if increased, to be honoured.

Welcome to the downside, where all bets are off.

It - with 100% surety - had to happen. Just a matter of when.



PDK, we didnt, quite a few others didnt either, some as long ago as the 1950s got it, but a minority. They spoke about it then but were ignored, it was too "profitable" for the can kickers to do anything but. Over the near (a fairly short, < 5years) time frame as the pain increases more and more, ppl will question and, more and more of those will listen to "us" that kicking the can cant be done, 60 years of it   stops with us, we all now pay.....some will without a doubt find the cost is their lives, 7 billion cannot be fed, so wont be......


" 7 billion cannot be fed "   -  sounds like another Mengele idea

So we've moved on from Mathusian to Mengele...

Again you mistake what I see as the future v what I want....what I write about  is what I think our future will be like, draconian, austere, shortlived, hungry....not how I'd want it.  This has been brought about by earlier generations mis-management. Even newer have been prolofic and wasteful of the stored and limited non-renewable resources we have...

This future is the result of not controlling our population decades ago, such was not acceptable so nature and the planet will do it for us in a bloody way.  Sometime inside the next 30 years, but frankly I suspect within 10....we will see a sharp global population decline to around 2 billion, welcome to what you deserve.




5 billion population decline within 10 years  !     thats Think Big but will it be spead evenly around all countries or only affect those with a ruinous ETS ?

5Billion population decline

Maybe I should be more clear, I expect the process to start within this decade it depends on peak oil's date. Basically once its clear oil production is dropping at about 4% per year our global popualtion will start to do the same thing.....just how fast it will be I dont know as it depends on the decline rate/curve, I would gues that once started 10 maybe 20 years would see it complete....2030 no later than 2050. 

ETS is a policy tool to get us efficient before this starts.

Developing world will bear the brunt I assume and those developed nations with populations that cant feed themselves, Japan with only the capability to produce 36% of its food needs springs to mind. Once say Thailand stops exporting grain and India follows suit its going to look dire for Japan.



cbs you are spot on - AB has no option and damned if he does, damned if he doesn't.

Anyway, found this transcript on ABC site from comedian John Clarke.. changed the names to suit NZ's future event comes Nov 2011...


[Scene: A car yard. BRYAN is perusing the stock. He is approached by JOHN]

John: Morning! Looking for a new car?
Bryan: Nope. Prime Minister, actually.
John: You’re the third one this morning. Anything in mind?
Bryan: You know....... nothing fancy, reliable, economical family model. Something to get the country from A to B.
John: You mean like a Key?
Bryan: Yeah....a little Johnny. Nothing flash, does the job. Low maintenance, economical, sensible. Runs for years, no troubles.
John: So.... you used to have one?
Bryan: Yeah. About 10 years. Great little model – don’t know why I got rid of him --biggest mistake I’ve ever made…
John: What happened?
Bryan: Traded him in for a Goff 11.
John: Big mistake…
Bryan: Lot of people bought it. Good political mileage.
John: How was the Goff 11?
Bryan: Came with a $50 factory rebate and CGT – that was good.
John: Anything else?
Bryan: Not much. Sounded nice but nothing under the bonnet. It was a lemon.
John: Didn’t stick around for long did it?
Bryan: Nah – had a factory recall. Shipped overseas and was never seen again.
John: What was the problem?
Bryan: Lots. But the final straw was the navigation system. Plug it in and it automatically loses its own way.
John: Whatcha got now?
Bryan: It’s a Goff-Norman.
John: The hybrid?
Bryan: Yeah. The Eco-drive system – not a good idea. An engine that can’t deliver hooked up to a transmission stuck in permanent reverse…
John: Green paintwork with a red interior. And steering that always lurches to the left for no apparent reason – that’s the one?
Bryan: The Clusterfxxk model.
John: The only one they made, Bryan. Not the vehicle of choice for the road to recovery – but did they finish up fixing the navigation system?
Bryan: Made it worse. Turn it on and it does a press release, heads off in all directions and goes nowhere.
John: So that’s why you’re here?
Bryan: That’s right. I’m stuck with a government that's wasteful, expensive, ineffective and past its use by date. I don’t suppose you’ve heard of the “Cash for Clunkers” scheme?
John: Join the queue brother.