24 Jun 2016

New Zealand's QE Problem

If we are correct in our view that most developed world central banks will follow the mantra "when in doubt print", the recent decline in the NZD might prove to be short lived. 

Historical evidence suggests that economies with loose monetary policies and inflation experience (for a period of time) undervalued currencies, while the opposite is experienced for economies running tight monetary policies. 

If the loose money policies of other countries start to induce inflation, the Reserve Bank of New Zealand will face a dilemma.  Should it:

  1. Maintain traditionally prudent interest rate levels to keep inflation at bay at the cost of a stronger than expected exchange rate, or
  2. Lower interest rates at the cost of high inflation? 

Currently, the RBNZ is mandated to avoid the second option.  This doesn't bode well for New Zealand's exporters.