The Bank of New Zealand raises rates

Earlier today, the Reserve Bank of New Zealand raised their short-term interest rate to an all-time high of 8.25 percent and Reserve Bank Governor Alan Bollard provided the following comments:

The New Zealand economy is running strong. We are recording continued big increases in international commodity prices, especially dairy, reflecting solid world demand for our products.

This is very good news for New Zealand. Given this positive situation, some of the negative commentary circulating about the economy is unwarranted.

However, the continued tight labour market, high capacity use, and rising oil and food prices all point to sustained inflationary pressures. That is why we are increasing the OCR today.

The New Zealand dollar has reached very high levels recently, driven by US dollar weakness and New Zealanders’ heavy demand for borrowing. This level of the currency has been hurting exports.

The high New Zealand dollar is not sustainable medium term and investors should understand this. The higher OCR now gives strong incentives to New Zealanders to save.

New Zealanders have been showing early signs of moderating their borrowing.

Provided they keep this up, and the pressure on resources continues to ease, we think the four successive OCR increases we have delivered will be sufficient to contain inflation.

The odd similarity to Zoolander aside, it's hard to mistake the seriousness of the bank in their approach toward inflation - "tight labour market, high capacity use, and rising oil and food prices all point to sustained inflationary pressures".

Apparently the RBNZ doesn't follow the Bernanke "inflation expectations" approach to controlling rising prices where it is believed that if you keep repeating over and over, "inflation is moderating" and "inflation is our predominant policy concern", that price increases will eventually moderate.

In New Zealand, they actually raise the cost of borrowing (the money supply growth would be checked over at The Economist, but they have apparently stopped publishing that data).

According to this Bloomberg report, this may be the end of the rate hikes and the kiwi may be set for a long, steady decline from the recent all-time highs against other freely traded currencies.

Bollard for the first time signaled he may be done raising interest rates, suggesting New Zealand's dollar will slide from a 22-year high that has forced exporters to close factories and fire workers as profits drop. Bollard has raised rates to curb domestic demand, which is stoking inflation toward the top of the 1 percent-to-3 percent range he targets.
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New Zealand's dollar bought 79.89 U.S. cents at 5 p.m. in Wellington from 80.36 cents immediately before the statement. The currency this week reached 81.10 U.S. cents, the highest since it began freely trading in March 1985.
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New Zealand's currency has been buoyed by the so-called carry trade, where investors borrow cheaply in the currencies of countries where interest rates are lower, such as Japan, to invest in assets with higher returns.

Japan's 0.5 percent rate is 7.75 percentage points lower than New Zealand's, which is the highest after Iceland's among countries with the top rating at Moody's Investors Service.
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Adding to signs domestic demand isn't slowing, retail sales rose twice as fast as expected in May, according to a government report on July 13. House prices increased at the fastest pace in 13 months in June and credit-card spending jumped 9.1 percent from June last year.
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Central banks worldwide are grappling to curb inflation pressures. Bank of England's policy makers this month increased their benchmark rate to 5.75 percent. The Bank of Canada this month raised its key rate for the first time in more than a year to 4.5 percent.

Don't bet on the kiwi losing too much for too long against the dollar - at least not as long as the carry-trade continues.