Posts Tagged "Europe"

Kiwi in Flight

Posted by on Mar 14, 2014 in Commentary, Featured, Market News

It’s been a long time coming. Of the major currencies commonly traded, there have been no interest rate increases since 2010 when Australia last increased its overnight rates. Australian rates didn’t last long at those levels and were reduced in stages soon afterwards, matching the other major economies. This time though, things feel different. On Wednesday evening this week, the Reserve Bank of New Zealand announced a rise in interest rates from 2.5% to 2.75% (well, Thursday morning in New Zealand at the time). An interest rate increase in any of the major currencies is as rare as New Zealand’s national bird, the kiwi. It’s currency, nick-named the kiwi was already strong and on the announcement, it flew higher. This might not be great news for mortgage holders in New Zealand and it might not get picked up by many commentators, but to me, this is a significant turning point. New Zealand is a small economy, not even in the top 50 in terms of GDP. Yet it’s currency is traded as one of the 8 majors. During the economic crisis and fall out after 2008, interest rates have been slashed. Other major economies went further and adopted measures such as quantitative easing (QE) to stimulate their economies. The talk is still of how to reduce the dependence of measures such as QE and “normalise” economies. In this regard, the Fed has its own tapering programme running at the moment. To me, the significance of the announcement is that it marks the beginnings of what could be called “normal” again. The New Zealand economy has been growing strongly. Export demand is healthy and many economic indicators suggest strong demand in the local economy with the prospect of inflation. How refreshing to see interest rates being used once more as a weapon to protect against inflation. As for the rest of the Western economies, I suspect they’ll be looking enviously at the Kiwi success. In Europe and the USA, the spectre of deflation has not been totally eliminated. In Japan, they are still working at creating inflation. In the UK and USA, we still have greatly indebted consumers, companies and governments. We’ve had the artificial stimulus of ultra-low interest rates for several years to get our economies bumbling along. Let’s hope the kiwi in flight is the light at the end of the tunnel we all hope...

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