Centralbankers dilemma ?

[WizOfOz]

I have been thinking for a while about how the interest rates is suppose to work and a thought came up:
What if the different interests rates betwen smaller countries and the bigger ones (Japan) make the 'function of rates' void.
Have a look at this article:
http://www.nzherald.co.nz/section/3/...ectid=10452541

"To fight inflation the Reserve Bank hiked interest rates, but because New Zealand had higher interest rates than other developed countries because it is a small economy, that attracted a flood of capital from offshore where rates are lower, which pushed up the exchange rate.

He said that aggravated the inflation problem and the central bank then had to increase rates again and start the whole cycle again."

I wonder how the RB's can sort that dilemma out in an envirmoent with rising inflation.
Any thoughts ?

/Wiz

BTW: Bear with my english

[metalman]

Re: Centralbankers dilemma ?

I have been thinking for a while about how the interest rates is suppose to work and a thought came up:
What if the different interests rates betwen smaller countries and the bigger ones (Japan) make the 'function of rates' void.
Have a look at this article:
http://www.nzherald.co.nz/section/3/...ectid=10452541

"To fight inflation the Reserve Bank hiked interest rates, but because New Zealand had higher interest rates than other developed countries because it is a small economy, that attracted a flood of capital from offshore where rates are lower, which pushed up the exchange rate.

He said that aggravated the inflation problem and the central bank then had to increase rates again and start the whole cycle again."

I wonder how the RB's can sort that dilemma out in an envirmoent with rising inflation.
Any thoughts ?

/Wiz

BTW: Bear with my english

good question.

where you hail from, wiz?

[WizOfOz]

Re: Centralbankers dilemma ?

good question.

where you hail from, wiz?

http://www.sweden.se


I suspect that we could end up in the same dilemma as NZ if our CB raises the rent.
That should indicate that the former use of the interest rate is void (or works backwards)

What do they do then ? Lower the rates in order to decrease the liquidiy :eek:

[jk]

Re: Centralbankers dilemma ?

please explain to me why a rising currency is said to increase the inflation problem. the inflow of capital will indeed raise asset prices, but not other prices [at least directly]. furthermore, the stronger currency will reduce domestic prices for imported goods, notably energy as well as manufactured goods. so why does a rising currency increase inflation?

[WizOfOz]

Re: Centralbankers dilemma ?

The CB controls the moneysupply by means of reducing or increasing the interest rate.
An increasing moneysupply (monetary inflation) alwas lead to an increase
in price sooner or later (price inflation).

A massiv inflow also makes the stock markets go up -> people will have more money to spend -> inflation and overheating.

Imho it's all in the low rates Japan is offering for the moment, but as long as that does'nt change I cannot see how CB's could 'sterilize the hot money' or 'mop up the excesses' ?