Table of Contents
- 1 What would happen if interest rates in New Zealand rose to a point where they were high relative to other countries?
- 2 How does monetary policy affect the exchange rate?
- 3 What is the impact of inflation on investors and savers?
- 4 How does the OCR impact interest rates?
- 5 Why monetary policy is important?
- 6 What factors affect the currency exchange rate?
- 7 What is the most appropriate exchange rate regime for New Zealand?
- 8 Should we be worried about the exchange rate?
What would happen if interest rates in New Zealand rose to a point where they were high relative to other countries?
If interest rates are relatively higher in New Zealand than in other economies, overseas investors will be more likely to invest in New Zealand as they receive a relatively larger return for their money. One such factor will be changes in the world market for the goods and services that New Zealand exports.
What happens if OCR increases?
As discussed above, an increase in the OCR tends to push New Zealand’s exchange rate higher. An increase in New Zealand’s exchange rate reduces the New Zealand dollar price of imports, thus putting downward pressure on inflation. Trading partner inflation also has an impact on New Zealand inflation pressures.
How does monetary policy affect the exchange rate?
When the government or Federal Reserve uses monetary or fiscal policy to expand the economy, this increases our income and our demand for imports, and ultimately lowers the exchange rate. Contractionary policies have the opposite effect.
How does inflation affect exchange rates?
How inflation affects the exchange rate. A higher inflation rate in the UK compared to other countries will tend to reduce the value of the Pound Sterling because: High inflation in the UK means that UK goods increase in price quicker than European goods. Therefore UK goods become less competitive.
What is the impact of inflation on investors and savers?
Inflation shrinks the buying capacity of currency and savings. The opposite of inflation is deflation, which is when prices decrease due to a lack of demand for services in a moribund economy. Stagflation is a combination of low growth and rising inflation.
What happens to exports when interest rates rise?
The weaker dollar means that goods produced in the United States are cheaper, so US exports will increase, and US imports will decrease. Thus changes in interest rates lead to changes in exchange rates, which in turn lead to changes in net exports . Net exports are also a component of aggregate expenditures.
How does the OCR impact interest rates?
How does the Official Cash Rate actually affect interest rates? Short term interest rates are influenced by the OCR. This is because banks are unlikely to lend money to people for rates less than they could receive from the Reserve Bank. Nor would they borrow at rates higher than they would pay the Reserve Bank.
What happens when cash rate increases?
Australian interest rates increase and decrease when the Reserve Bank of Australia makes changes to the cash rate. When the cash rate increases, it increases the cost of borrowing. The RBA determines economic policy. An economic policy helps stabilise the economy under all circumstances.
Why monetary policy is important?
The goals of monetary policy are to promote maximum employment, stable prices and moderate long-term interest rates. By implementing effective monetary policy, the Fed can maintain stable prices, thereby supporting conditions for long-term economic growth and maximum employment.
How do exchange rates affect international trade?
The exchange rate has an effect on the trade surplus or deficit, which in turn affects the exchange rate, and so on. In general, however, a weaker domestic currency stimulates exports and makes imports more expensive. Conversely, a strong domestic currency hampers exports and makes imports cheaper.
What factors affect the currency exchange rate?
9 Factors That Influence Currency Exchange Rates
- Inflation. Inflation is the relative purchasing power of a currency compared to other currencies.
- Interest Rates.
- Public Debt.
- Political Stability.
- Economic Health.
- Balance of Trade.
- Current Account Deficit.
- Confidence/ Speculation.
Is the New Zealand dollar too high or too low?
When the New Zealand dollar is either high or low, it tends to remain high or low for longer than the exchange rates of other countries. So in the current situation, not only is it clear that the real exchange rate is high, it is also likely that this elevation will persist for some time.
What is the most appropriate exchange rate regime for New Zealand?
This paper first explores alternative exchange rate regimes, and finds that the freely-floating exchange rate regime is still the most appropriate for New Zealand. Second, this paper explores ways to reduce exchange rate variability within the existing framework.
Does New Zealand need to tackle its foreign savings and investment gap?
Since the savings and investment gap plays a prominent role in New Zealand’s exchange rate story, it seems reasonable to suggest that it will be necessary to tackle our reliance on foreign savings to finance our consumption and investment.
Should we be worried about the exchange rate?
Concern about the exchange rate is understandable. Movements in, and the level of, the exchange rate can have substantial impacts on the performance and structure of the New Zealand economy and on people’s livelihoods. The exchange rate is important and the Reserve Bank devotes a great deal of resources to understanding it.