July 26, 2007
Cause and Effect
Exporters were watching Dr Bollard's decision closely today. Photos / New Zealand Herald
Today the NZ Reserve Bank increased cash rate from 8.00% (the same as Ukraine) to 8.25% (the same as Indonesia) to curb the domestic inflation.
Apparently Kiwis spend way too much on their lattes and houses. Much more than they earn, so they are deeply in debt (buying cars on credit card and taking 100% mortgages). As the official cash rate increases, it means that the average mortgage interest will rise over 10%, credit card interest will also rise and Kiwis will come to their senses and stop spending.
A small catch there is that you can deduct interest on your investment property mortgage as "expenses" from your income tax. So as the mortgage rates rise, it affects only the people that try to pay off their family home, investors can deduct it from their taxes anyway... So they can keep borrowing and spending, even if mortgage interest is 20%. And when they sell, they don't have to pay capital income tax. Great!
Another effect of high cash rate is that interest on your savings accounts is very high, we get 7.5% on an ordinary savings account and term deposits can generate up to 9% interest. Wow!
Obviously everyone can see the benefit of this, so NZ dollar is an extremely popular currency with foreign investors. Japan (with its cash rate of 1% or so) just can't get enough of kiwi dollar. When everyone wants to something, what happens? The value rises, right? So kiwi dollar now is worth over US 80cnt. Great to be earning money in this country and spending it elsewhere at the moment. A disaster for anyone who tries to manufacture/produce anything here and sell overseas (and majority of NZ businesses do just that!)
NZ economy in a nutshell for you. And everyone is waiting for some kind of a crash... The steam has to go somewhere?
Posted by gkligyte at July 26, 2007 01:23 PM