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Why our interest rates are the highest in the world

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  • Why our interest rates are the highest in the world

    Hi Guys

    Article in this morning's Dominion ties to explain why our interest rates are among the highest in the world.

    Why our interest rates are the highest in the world

    SATURDAY , 04 SEPTEMBER 2004


    New Zealand interest rates are the highest in the Western world, and they are likely to go even higher next week.

    Reserve Bank governor Alan Bollard is almost certain to lift interest rates on Thursday, and again in October, taking the official cash rate up to 6.5 per cent.

    At 6 per cent, New Zealand's rate already easily tops Australia's 5.25 per cent and is far higher than the United States on 1.5 per cent and Japan on just 0.1 per cent.

    Why? The main reason is that New Zealand's economy is running brilliantly. In contrast, the US is trying to recover from a big downturn and Japan is just emerging from a 10-year stagnation.

    They need much lower rates to boost their economies and face little prospect of inflation getting away.

    There is a view that if the New Zealand economy grows faster than 3 per cent a year, interest rates have to rise to prevent inflation, and some economists expect inflation to hit 3.5 per cent next year.

    The central bank fears the party is getting a little out of hand, with inflation rising because of rising oil prices, higher commodity prices, a labour shortage and a hot housing market.

    So rates go up.

    If rates rise too far, business slows and eventually prices fall.

    If people are not willing to pay higher interest rates then borrowing, business investment and spending will all slow and eventually rates fall to an acceptable level – or so the theory goes.

    Longer-term, New Zealanders always face higher interest rates than people in other countries because we borrow billions of dollars overseas.

    The main reason for the extent of the borrowing is that, simply, Kiwis don't save enough to lend to each other.

    Foreign lenders demand a high return from New Zealand because it is a small, remote and relatively narrow farm-based economy.

    Until recently, New Zealand had a relatively poor inflation history and we are seen as a bigger risk.

    "And we don't have a brilliant savings history," Institute of Economic Research director Brent Layton says. Our "neutral" interest rate, though, has been falling over time.

    As another economist put it: Whom would you prefer to lend to in your neighbourhood? The farmer with some sheep and cows, or someone with a much bigger ranch with animals and gold and coal mines, to boot?

    Regards
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

  • #2
    Hi Muppet,

    I am back to this forum.

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