Okay. I don't make predictions about things that are unpredictable. But I will come as close as possible here without crossing the line: We are now witnessing the beginning of central banks competing for buyers of debt. This competition will spark a chain reaction. This move by New Zealand was very unexpected; a bombshell, if you will. I think it is unlikely that this won't adversely impact financial markets. Bonds/Interest rates and equities have a historically inverse relationship. What will Australia, another debt laden nation, that is also a participant in the carry trade, now do in response to New Zealand's move? What will the European Central Bank do, or the Bank of England? How will this affect FOMC policy? What impact will it have on the Bank of Japan? This is a major event. http://www.bloomberg.com/apps/news?pid=20601080&sid=asEXMBn_NjU0&refer=asia New Zealand Raises Key Interest Rate to Record 8% (Update3) By Tracy Withers June 7 (Bloomberg) -- New Zealand's central bank unexpectedly raised its benchmark interest rate to a record 8 percent, saying housing demand and consumer spending are fanning inflation. The currency rose to a 22-year high. ``A sustained period of slower growth in domestic activity will be required to alleviate inflation pressures,'' Reserve Bank Governor Alan Bollard said in a statement released in Wellington today. A 60 percent surge in world prices of dairy products the past six months has boosted farmers' incomes and will stoke inflation next year, he said. Bollard's third rate increase since March is buoying New Zealand's dollar as investors are attracted to a benchmark rate second only to Iceland's among countries with the highest credit rating. There is no conclusive evidence consumer spending is slowing, Bollard said today. ``The bank wants the slowdown in domestic spending to be sustained, so it's doing more than is needed,'' said Cameron Bagrie, chief economist at ANZ National Bank Ltd. in Wellington. ``The statement leaves the door open for future hikes. There is still very much a risk of that going forward.'' The New Zealand dollar rose to 75.67 U.S. cents, the highest since it began freely trading in March 1985, from 75.12 cents before the statement. It bought 75.44 cents at 10:40 a.m. in Wellington. There is a 47 percent chance of a quarter-point rate increase at the next central bank review on July 26, according to an index calculated by Credit Suisse and based on interest-rate swaps trading. Inflation Target Bollard is not alone in raising rates to combat inflation. The European Central Bank yesterday raised its benchmark to a six-year high of 4 percent. The Bank of England's benchmark rate is at a six- year high of 5.5 percent after four increases in the past year, most recently on May 10. The Reserve Bank of Australia yesterday left its benchmark at a six-year-high 6.25 percent. Futures traders have priced in another increase by the end of this year, which would take the rate to a 10- year high. Bollard is required to keep inflation between 1 percent and 3 percent. Annual inflation will slow to 2.2 percent by March next year and then accelerate to 2.8 percent by March 2009, the Reserve Bank said. Consumer prices rose 2.5 percent in the 12 months ended March 31, 2007. Just three of 14 economists surveyed by Bloomberg News expected an increase today. Eleven forecast no change. Soaring Currency New Zealand's official cash rate, introduced in March 1999, is 7.5 percentage points more than Japan's benchmark and 2.5 points more than the Federal Reserve's target. The local currency has gained as traders borrow at cheaper rates in Japan and invest in New Zealand's higher yields, in what is known as the carry trade. In the past year, the local dollar gained 21 percent against the U.S. dollar, the best performer among the world's 16 most-traded currencies. ``The exchange rate is at levels that are both exceptionally high and unjustified on the basis of New Zealand's medium-term fundamentals,'' Bollard said. Skellerup Holdings Ltd., which exports rubber goods used in medicine and irrigation, this week said full-year profit will fall by 34 percent because of the currency's gain. The company is planning to stop some local production and fire workers because it is cheaper to make goods overseas, it said. Dairy products such as milk powder, butter and cheese are New Zealand's biggest exports, followed by meat. Exports make up 30 percent of the nation's $102 billion economy. Tourism accounts for 10 percent. Farm Incomes Fonterra Cooperative Group Ltd., the world's biggest dairy exporter, said on May 23 it will pay farmers 27 percent more for milk this year as global prices rise. The central bank estimates the increased payments will add almost $NZ2 billion ($1.5 billion) to dairy farm incomes in the next two years. ``The rise in dairy sector incomes will provide a substantial boost to economic activity over the next few years, but will also add to inflation pressures,'' Bollard said. Economic growth will accelerate to 3.1 percent in the year ending March 31, 2008, from 1.7 percent a year earlier, the central bank said in economic forecasts also released today. ``Housing market activity has been buoyant, consumer confidence has remained relatively robust and a range of business sector indicators including employment and investment intentions have been strong,'' Bollard said. Home sales rose 8.1 percent in April from a year earlier, according to a May 16 report from the Real Estate Institute of New Zealand Inc. First-quarter retail sales rose at the fastest pace since records began in 1995. Economic Growth Bollard increased rates nine times between January 2004 and December 2005. A 15-month pause ended in March when he said inflation may have accelerated beyond the top of his target range unless he increased borrowing costs. ``Had we not increased rates this year, it is likely that the inflation outlook would now be looking uncomfortably high,'' he said. Today's increase ``is to ensure that inflation outcomes remain consistent with achieving the target.'' Signs are emerging that economic growth may slow. Just 29 percent of companies surveyed by ANZ National Bank last month expect sales will rise in the next 12 months, the weakest confidence reading since August. The outlook for hiring, investment and exports suggests economic growth may be 1 percent this year, or a third of the pace Bollard forecast in March.
i was surprised by the muted reaction in the NZD. When it popped higher i was expecting it to keep going for at least a cent. Currency could be vulnerable here -tad of care on those bids matey!
Savers in the USA are still being ripped off. Time to take the punch bowl away from these punks at the hedge funds, and make them PAY legitimate interest rates for my hard earned savings. Your cash is being arbed away by the quants and deal makers.
This isn't the first time New Zealand's central bank has 'unexpectedly' raised interest rates recently. It says a lot for the resilience of the carry trade that there hasn't been mass unwinding. Non-event is the best description.
Agree with you 110%! This country has been ripping off savers and especially retirees for years! What a shame.
Why would they unwind it the increased return they recieve for holding kiwi is the reason they put these trades on. Unless i am mad otherwise everyone would be long up to their ears in Jap debt paying 1%
How does one buy New Zealand treasury notes and bonds? Are they offered through local brokers like USA T-bills?
Indonesia lowered interest rate today, so at least there is some part of the world which does not agree with the inflation rising theory.
I need to get some sleep. I suppose I meant there's been no "melt up" so everything is orderly or something... The point being, it's no big deal.
If you've ever heard Bollard, you wouldn't use the word "unexpected". I'd be willing to bet it breaks their economy, though. I bet he's surprised it hasn't already, too. Will others follow? I'm not sure there. Others aren't willing to cause any pain in the interest of having sound money. How sound can paper confetti be, long term, anyway. Eventually even Bollard will have to capitulate and get into the "race to the bottom" with everyone else, once NZ's economy goes in the tank. Rest assured we will win the race. The prize will be having dollars nobody will ever want to see or hear about ever again.