Macroeconomics of New Zealand college essay help service Political Science

New Zealanders directly encounter the main instrument of monetary policy, the Official Cash Rate (OCR), when they borrow money at retail interest rates through mortgages, credit cards or personal loans, or when they save money in bank accounts that earn interest. The Official Cash Rate is an instrument that has been used by New Zealand since 1999 to regulate the whole sale price of goods and services. This then results the adjustment of Consumer Price Index that measures inflation. As the graph shows, New Zealand’s inflation rate was similar to the rest of the worlds at the time of wars and the Great Depression.

However, right after establishing the Official Cash Rate, the reserve bank could keep the CPI inflation relatively low. The agreement signed in September 2002 required the Reserve Bank to keep inflation between 1–3 percent a year, on average, over the medium term. For example, in January 2001, the Reserve Bank decided to leave the OCR unchanged at 6. 5 per cent. The decision is due to the fact that the exchange rate has strengthened and the economy worldwide was doing better than expected just as inflation which was rising but not significantly, so they might consider raising the OCR the next time of viewing.

In September 2001, the reserve bank announced an unscheduled interest rate cut, primarily because of the tragic events (11 September) in the United States. Back then, it seemed like that the slowdown in the world economy would worsen. New Zealand business and consumer confidence was hurt by international and domestic developments. This period is definitely the time of heightened uncertainty. So the Reserve Bank cut the OCR by 50 basis points from 5. 75% to 5. 25%. Exchange rate Events in the world have contributed to sharp falls in business confidence.

Consumer confidence is also at its lowest since the middle of 2000. That would result weaker spending by households. That is why the reserve bank of New Zealand decided to cut on interest rate. Short-term interest rates fell during October as the market priced in further falls in interest rates. Consumer confidence is now at its lowest level since the middle of 2000. If sustained, the fall in confidence is likely to flow into weaker spending by households. The likelihood of falls in confidence likely contributed to the RBNZ’s decision to cut interest rates.

A fall in business and consumer confidence was widely anticipated, and the possibility that this would lead to lower consumer and business spending likely contributed to the September 19 reduction in the Official Cash Rate by the RBNZ. Nevertheless, the size of the falls in confidence, and recent events and data overseas, has led many market analysts to expect a further cut in the OCR at the time of the November 14 Monetary Policy Statement. Short-term interest rates fell during October as the market priced in further falls in interest rates. Markets have now fully priced in a 50 basis point cut in the OCR.