Heather Roy's Diary

What's To Be Done With The New Zealand Dollar?

Yesterday's announcement that the Official Cash Rate had been raised by a quarter of a percent, to 8.25 percent, was hard to miss. While Kiwis with mortgages and floating interest rates will be awaiting the next letter from the bank telling them that their interest rates have increased yet again, exporters will be waiting for the noose around their necks to be tightened even further.

New Zealand has some of the highest interest rates in the western world, making it difficult for most homeowners to service a mortgage.

I recently read that the average mortgage repayment in Auckland is equal to the average wage. Only double incomes are keeping people in food and clothing.

Those same high interest rates prove very attractive to the international investors who queue up to buy New Zealand bonds. The attraction is clear, given that the gap in interest rates between New Zealand and many other countries is huge - for example, Japan has just emerged from a prolonged period of negative inflation in which its retail prices actually declined.

During that time it was difficult for Japanese investors to realise returns of over one percent within Japan itself, and some banks agreed to look after investors' money but paid no interest.

To the hard-saving Japanese, New Zealand's eight percent interest rates looked attractive - if risky. Those who took the risk were richly rewarded and 'The Japanese Housewife' has become a code for the international investor in New Zealand.

The problem has been that the large number of buyers for our dollars has driven up the price of our currency. At 81 cents to the US dollar, many of our exporters are in agony. That's why farmers and other exporting groups are pushing hard to get the Reserve Bank Governor to stop raising interest rates.

Exporting is becoming unprofitable, and we already have a large balance of payments deficit. Higher interest rates will simply encourage more foreign money and a higher New Zealand dollar - which hurts exporters again. However, the Reserve Bank works under tight legal constraints and is expected by Government to dampen the economy and keep inflation below three percent - meaning interest rates are likely to remain high for some time yet.

The paradox in all of this is that the country is awash with cash due to the influx of foreign investment. Banks offer 100 percent mortgages - to the fury of the Finance Minister, who worries that it is inflationary - and Governors of the Reserve Bank repeatedly ask for a capital gains tax. Folly of follies, we've even sent Treasury officials to Japan to try to talk them out of buying our bonds.

There is an increasing body of opinion that the answer lies in lowering interest rates, rather than raising them. The most distinguished economist to espouse this view is Steve Hanke who, in a recent interview on 'Morning Report', described the New Zealand economy as being in a "death spiral". By this, he meant that higher interest rates would attract more foreign money. As all schoolchildren studying basic economics know: inflation is 'too much money chasing too few goods'. Having the country awash with foreign capital causes more inflation.

Although Professor Hanke works for the Right-Wing Cato Institute his views have proved surprisingly popular on the Left. They have been cited by Chris Trotter and Matt Robson, although they attributed him to the more politically acceptable John Hopkins University - and Chris Trotter managed to spell Professor Hanke's name wrong.

Professor Hanke suggests that we peg our dollar to a large currency - like the US dollar - or to a basket of currencies. This concept is not dis-similar to that of Richard Prebble, who suggested we simply adopt the Australian dollar as our currency. Our small, open, free enterprise market economy is subject to wide fluctuation depending on what is happening to other currencies around the world.

To some extent the problem may never be solved. Milton Friedman once said that it is desirable to have stable prices (zero inflation), a stable exchange rate and stable interest rates. In his opinion it was possible to have any two of these at any given time, but not all three - so far, Dr Cullen has managed to score zero out of three.

Lest We Forget

This week saw another Kiwi recognised for their leaderships and bravery under fire.

A former New Zealand Territorial soldier, Corporal Terry Knights was awarded the Military Cross - one of Britain's highest military awards for bravery under fire - for his bravery and leadership in the Middle East.

Cpl Knights serves with the Royal British Marines, having joined 17 years ago while travelling in Britain, and earned the award during his second tour of duty in Iraq.

The Military Cross is Britain's third highest defence force honour and was awarded to Cpl Knights for "gallantry during active operations against the enemy".

ENDS

© Scoop Media