The Causes of Inflationary Pressure on New Zealand’s Economy

Since the Central Bank has the exclusive right to issue money in the economy, it can have extensive influence on the determination of interest rate in financial markets and in the economy as a whole, by adjusting the interest rate on short-term loans to financial institutions. Central Bank interest rates on these loans therefore have the most immediate impact on other short-term interest rates in the money market. By influencing interest rates, monetary policy then has an effect on the savings and expenditure decisions of individuals and corporate.

1. What is inflation? Inflation is an increase in prices for goods and services (What is Inflation?).

For the period of high inflation, government’s goal is to lessen the spending in the economy by making it less attractive to acquire loans or by taking currency out of circulation which eventually reduces inflation (Investopedia, 2008). “A major reduction in the rate of money-supply expansion ultimately will reduce even strongly entrenched inflation. But this accomplishment may take several years during which output and employment both fall (Wirick, 2001)”. The new contractionary monetary policy in New Brunswick will directly raise the interest rate by making money harder and more expensive to obtain. As a result, investment in New Brunswick will fall because the cost of borrowing money increases. Net exports tend to rise due to an increase in the interest rates because New Brunswick’s investment will relatively be more attractive to both domestic and foreign investors.

As the inflation rate rises, I will have to redistribute my income. I would have to be stricter with my spending habits compared to an economy that has a low inflation rate. As the prices of everything around me starts to go up, I will have to be able to adjust my spending habits to make sure that my necessities are taking care of and that I am still able to spend more. By the inflation rates going up, this can have a negative impact on some manufacturers. As inflation goes up, I will not be the only person in the economy cutting back on unnecessary spending and be stricter with my money. A perfect example is when the price of gas took a significant increase during the mid-2000s. Car manufactures started to see that people were spending less on purchasing cars. Another reason why I will have to stricter with my money after a significant increase in inflation rates is the idea that I may be impacted by a pay cut or completely laid off.

Other economic influences could be that inflation may rise faster than expected in the future as a result of the U.S.’s selling of its debt overseas and the value of the U.S. dollar could fall. (Beams, 2004)

Demand for housing, particularly in Sydney and Melbourne, greatly outnumbers the supply available. Simple supply/demand economics tells us that this undersupply of property in the face of overwhelming demand will cause inflation. From March 2014 to March 2015, Sydney saw an average property price increase of 13.1% (ABS: Residential Property Price Indexes 2015). Currently, the RBA’s reaction to this is to play it safe by keeping cash rates at 2% (RBA: Monetary Policy Decision July 2015). The RBA want growth to be sustainable and long term on the Australian economy during a difficult time, but how does this affect the housing market? This lowers the risk of defaulted loans for buyers, particularly on fixed interest rate mortgages. ASIC chariman Greg Hedcraft says that Australia is experiencing a similar housing bubble to the U.S. pre GFC. This was caused by high interest rates and borrowers defaulting loans due to unexpected heightened interest rates, crushing the U.S. (and international) economy. However the RBAs recent interest rate decisions have been heavily criticised, with economists believing that these low interest rates, high consumer incentive to ‘buy now’, and predicted growing unemployment rates – peaking at 6.5% (Federal Budget 2015) could lead to future mortgage defaults and a large debt problem. Australia’s current economic state involving one

When the price level rises, each unit of currency buys fewer goods and services. Over the long term, unanticipated inflation can cause a number of problems for an economy. Businesses will invest less in long-term projects because of the uncertainty of returns, price information becomes unclear, and consumers will spend more time trying to protect themselves from inflation and less time engaging in productive activities. If the Australia’s inflation rate is above normal range, then its cause for concern. It has impact on various ways in the economy.

To reduce money supply for fighting inflation the Central Bank can also raise cash reserve ratio of the banks. The higher cash reserve ratio implies that the banks have to keep more cash reserve with the Central Bank. As a result, the cash reserves with the banks fall which force them to contract credit. With this money supply in the economy

In the last year alone, the RBA have lowered the cash rate by 50 basis points, from 2.50 to 2.0 percent. This was implemented, as the global economy grew at a moderate pace, however the Australian dollar declined against the American Dollar. The Reserve Bank of Australia decided that a lower exchange rate was needed to achieve balanced growth in the economy. Once the RBA changed the cash rate, the other major banks followed suit.

Since the early 1980s, successive governments have deregulated financial and labour markets and reduced trade barriers making Australia one of the Asia–Pacific’s wealthiest nations who has enjoyed more than two decades of economic expansion. Although Australia managed to emerge from the global financial crisis relatively unscathed, their impetus expenditure by the previous Labour government generated a fiscal deficit. Australia is globally

Construction costs as well as office rents are the lowest compared to all developing countries. Being that the nation counts with an energetic sector and with a high amount of natural resources, it generates low costs in the electricity for the industries. There is a great competition of suppliers in the telecommunications market which makes it a great advantage for New Zealand companies. With all these advantages the nation becomes attractive and one of the most sought for investment by all the leading countries of the

OCR is the main tool that Reserve Bank uses to conduct the monetary policy. It is important because whenever the Bank makes a decision to change the interest rate (cost of borrowing money), it will greatly affect to spending and investment. As a result, changes of OCR will lead to either higher prices (inflation) or lower prices (deflation). The RBNZ discuss fully the OCR every six weeks based on its economic and financial figures. The Banks does so frequently since it wants to make sure that the inflation is stable and this helps the entire economy operate smoothly and sustainably.

The main issue in the article is the decline of the Australian dollar against the US dollar. Upon perusing it is understood that the Australian dollar is steadily declining during the current year. The economists said that this is due to the fall of commodity prices globally. The Australia is agriculture and resource based economy, and the Australian dollar heavily depends on commodity price and terms of trade. According to the IMF the reason for the falling commodity prices is the slowing of demand globally. It’s mentioned that Australia, Canada and New Zealand are the three of the worst performing currencies of 2015. In order to stimulate economy the Reserve Bank of Australia is planning to cut its rate to 1.5% before March 2016 to deal with lower GDP and low domestic demand that is increasing unemployment. Mining investment has slowed down, which reduced the value of iron ore, causing Capital imports to fall in Australia. If the dollar declines too far, then Australia’s import will be reduced and this is difficult for businesses. Another nail in the coffin for the Australian economy is the plan to raise the rates of UK and US which could further decline the value of AUD.

We observe appreciation within the Australian rate of exchange once an increase in commodity prices occurs and an improvement in Australia's terms of trade. In 2008, we observed commodity value indexes collapse, leading in successively to sharp decreases within the Australian dollar. As commodity costs have surged once more, this has caused farther appreciation of the Australian dollar. Lower inflation in Australia is another catalyst for appreciation of the currency. Over the years, an accrued demand for Australia's exported product and services has been indicative of Appreciation. As a significant exporter of natural products, Australia's terms of trade and future (long term) export performance are powerfully influenced by the costs of these products. With these costs currently over thrice their value held at the beginning of the resources boom in 2003, this has provoked speculative investment within the Australian dollar. When there are expectations prevalent, that the currency will appreciate based on speculation of the other changes in the domestic and global economy, we are sure to see this causing an actual appreciation in the Australian currency. Additionally Depreciation can be a consequence of a decrease in Australian interest rates or increase in overseas interest rates. Depreciation will occur when there is deterioration in investment opportunities in Australia or

Inflation; ‘a situation in which prices rise in order to keep up with increased production costs… result[ing] [in] the purchasing power of money fall[ing]’ (Collin:101) is quickly becoming a problem for the government of the United Kingdom in these post-recession years. The economic recovery, essential to the wellbeing of the British economy, may be in jeopardy as inflation continues to rise, reducing the purchasing power of the public. This, in turn, reduces demand for goods and services, and could potentially plummet the UK back into recession. This essay discusses the causes of inflation, policy options available to the UK government and the Bank of England (the central bank of the UK responsible for monetary policy), and the effects