Currency: New Zealand Dollar
Common Name: Kiwi
Quotation Convention: 4 decimal points
Most liquid cross: NZD/USD
Average Bid/Offer : 5 pips (0.6200 / 0.6205)
1 pip: 0.0001 USD
Settlement: Transaction plus two days (T+2)
Economic Indicators for New Zealand
- Balance of Goods and Services
- Consumer Price Index (CPI)
- Gross Domestic Product (GDP)
- Private Consumption
- Producer Price Index (PPI)
Economic Overview
New Zealand has a fairly small economy compared to other industrialized nations, with its 2005 GDP valued at approximately US$97.39bln. The country's population is equivalent to half of the population of New York City, although it inhabits an area more than 300 times as large. During the past 20 years, New Zealand's government has transformed the country into an industrialized, free market economy that competes globally. This rapid growth has boosted incomes, increased the technological advancements, and controlled inflation. Per capita income has risen for seven consecutive years, and is now valued at $24,100.
New Zealand depends heavily on trade, especially of agricultural products, to drive the country's growth. Exports of goods and services represent about 20 percent of GDP. The country's trade deficit is US$2.36bln. Due to the small size of the economy and its significant trade activities, New Zealand is highly sensitive to global performance, especially with its key trading partners, Australia, the U.S., Japan and China. New Zealand's national deficit is comparatively small, at US$57.67bln.
Because of New Zealand's small population, increases in migration can have significant effects on its economy. Between 2002 and 2003, the population growth rate increased 2,205 percent. This increase in migration noticeably affected the economy, due to the increase in overall consumer consumption.
New Zealand's GDP is very sensitive to severe weather conditions that can damage farming activities. Recent droughts within the country have injured its economy, but droughts in Australia can also negatively impact New Zealand's economy.
Economic Policy Makers and Tools
The Reserve Bank of New Zealand (RBNZ) is the country's central bank. The RBNZ seeks to maintain the stability and efficiency of the financial system through carrying out monetary policy, promoting and maintaining a sound and efficient financial system, and meeting the currency needs of the public. The RBNZ and its minister of finance outline monetary policy in the Policy Targets Agreement, with the most recent PTA requiring the RBNZ to keep inflation at a medium-term average between 1 to 3 percent.
The Reserve Bank of New Zealand sets the official cash rate (OCR), which is an interest rate used to implement monetary policy and maintain price stability. The OCR is reviewed eight times per year. When an OCR is set, the RBNZ will pay financial institutions an interest rate 0.25 percent below the OCR for money deposited in the bank's settlement accounts. The Reserve Bank of New Zealand also provides overnight cash to banks against good security, charging interest at 0.25 percent above the OCR. The RBNZ does not set a limit on the amount of cash that it will take in or let out at 0.25 percent above or below the OCR. The effect of this is that no bank is likely to offer short-term loans at a rate significantly higher or lower than the official cash rate because other banks would undercut the rate or receive interest at the OCR level. Therefore, the RBNZ is able to lend or borrow overnight money in whatever volumes are needed to keep the market interest rate at the bank's OCR level. By controlling short-term interest rates this way, the Reserve Bank of New Zealand influences short-term demand in the economy, putting upwards or downwards pressure on average prices.
The Reserve Bank of New Zealand also borrows or lends cash through open market operations to offset the government's daily transactions. The RBNZ uses repurchase agreements (repos) to withdraw cash and reverse repos to supply cash. Every banking day at 9:30 a.m., the RBNZ announces the details of its open market operations, including the repurchase date for each of the agreements, and how much it is willing to borrow or lend for each date. Then, for the next 15 minutes, settlement account holders can submit bids, expressed as interest rates. Because these repos are usually for only a few days, the interest rate in a repo tends to be close to the RBNZ's official cash rate. The Reserve Bank of New Zealand announces a minimum rate at which it will lend or a maximum at which it will borrow, depending on whether it is depositing or withdrawing cash on the day. The minimum or maximum is estimated from market rates, and is designed to ensure that the RBNZ conducts transactions at fair market rates. Sometimes its open market operations fail, in that there are not enough acceptable bids to fully offset the government's cash flows. If this happens, the institutions will need to use an overnight repo facility to make up any shortages.
Characteristics and Trends
- The New Zealand economy benefits from a strong Australian economy, due to the proximity of the countries and New Zealand's emphasis on trade.
- Interest rate differentials between the cash rates of New Zealand and Australia, and between short-term interest rate yields of New Zealand and other industrial countries, are closely followed.
- The NZD is a commodity-linked currency, so as commodity prices increase, the NZD tends to appreciate.
- The NZD is one of the most popular currencies to purchase for carry trades, due to New Zealand's high interest rates.
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