Forum Archive Index - February 2004

[mixtrader <mixtrader@clear.net.nz>]

Gary

 

I agree with your sentiments.  Note, however, that RBNZ has no control over fiscal policy (that is reserved for the more academic pursuits of "Dr. Cullen"), and it only implements monetary policy through the OCR and the reserve contributions required of registered banks.

 

Obviously, the OCR is one component of Foreign Direct Investment (FDI).  The greatest component of obtaining investment from offshore is the prevailing business climate and the returns that investors might expect to receive as a result of pouring money into our small economy.

 

FDI takes many forms eg from Toll buying into TransRail through to foreign banks lending to NZ companies.  In all cases they do this because they can see a profit for their trouble that exceeds the profit that they could realise from an alternative investment.  Its just like us investing in shares, we try to avoid the dogs and (depending on our investment horizon) look to achieve maximum gain relative to our personal risk aversion.

 

With a currency floating at market rates, and currency markets being a particularly active component of the global economy, RBNZ has no hope of controlling the "value" of the NZ$ other than through mechanisms which affect returns (ie the OCR).  When they make mistakes, however, such as the recent raising of the OCR in an attempt to curb the "excesses of the housing market" and the pressure that has put on inflation (I believe they acted too soon - the housing bubble had already reached near maximum expansion when the OCR was raised), the overall impact is that the currency increases in value because inflationary outlook is stable and returns to FDI have improved.

 

A reduction in the OCR probably would have impeded FDI.  On the other hand (a phrase typically attributed to economists), there probably would have been greater investment into the equities sector of the market and the "excess" values of real estate would have been held at around current levels.  In my opinion, the real estate market will lose some value as a result of an increase in the OCR - there will also be some hardship to investors that are excessively leveraged in that market, something that Bollard had been warning about for months prior to the change in the OCR.