Your view is that Japanese investors will still lend to Australian banks who will take a healthy margin and lend more to NZ home owners who cannot believe their luck as affordability increases massively. The continuing influx of currency holds up the exchange rate. Certainly plausible.

Now what happens if the government puts in local punitive prudential assurance measures that make a bank hold more capital than they have been accustomed to on residential lending. You will argue that with their healthy margin they can afford a high capital ratio.

Where I have been leading is what circumstances New Zealand can dissuade Japanese lenders from supporting the NZ residential market with excessive credit.

@Phil Sage (sagenz)

Hi Phil,

I discussed what would happen with an OCR cut to 0.5% in a previous comment. In the follow up comment I suggested why global rates may be too low. Outside of that we aren’t really talking about monetary policy.

We have to remember that the Bank’s ability to influence the interest rate below the world rate is quite weak – as there is a whole lot of global capital out there. The actual effective risk free rate isn’t going to fall to 0.5% if the OCR is cut to that level.

With Treasury “sucking up foreign currency” are you talking about the government borrowing to fund expenditure? The main issue of debate here should be on the quality of the government spending relative to the international cost of borrowing.

I want to know what happens when Treasury is not sucking up foreign currency

So, you are saying what do we do when the world is artifically holding interest rates down.

Over time this should push up the relative value of our currency, and cause inflation overseas. I would be concerned about the potential for this to lead to New Zealand “overconsuming” in the short term.

However, this isn’t the fault of our central bank – this is the rest of the world f’ing us over. We probably need to sit down and try to figure out how to respond to the rest of the world f’ing us over – and I believe that is what the RBNZ is doing with their prudential policy.

lets also agree that global lenders see a degree of long term exchange risk in the new low interest New Zealand and can seek better returns elsewhere. What happens to the supply of credit for residential lending?

What impact does the move of money based in New Zealand at high rates have on supply of foreign credit and the exchange rate?

It depends on why the market saw us cutting the OCR.

If the RBNZ said they were cutting it, even though there was no perceived difference in the economic situation (they had just completely changed their policy tack) then the impact on the exchange rate would be ambiguous. Probably a drop at first, but possibly some recovery over the intervening months.

The lower OCR would be passed on by banks who would loan – however, how much lower interest rates would be would depend on RBNZ prudential policy (are the retail banks stuck trying to source credit at the world interest rate, instead of getting cheap credit off the Bank).

Given an infinite supply of credit at the world interest rate, the lower domestic interest rate would lead to more residential lending methinks.

However, this is all a mute point – a sudden cut in the OCR would probably be taken as a panic move by most of the world, leading to a lower exchange rate and possibly higher domestic interest rates.

I am not sure that Labour is clear on what they are doing so far – just looking for votes.

http://www.anz.co.nz/commercial-institutional/economic-markets-research/commodity-price-index/

World prices have had a significantly higher variance than NZ$ prices.