The subsequent “search for yield” by investors, coupled with excess liquidity and low levels of financial market volatility, generated substantial portfolio inflows into New Zealand and put upward pressure on the exchange rate. An additional factor exerting upward pressure on the exchange rate over many years has been the persistent gap between savings and investment.
Over the past forty years New Zealand has demanded more investment in housing, infrastructure and other assets than its domestic savings could finance. New Zealanders’ relatively high propensity to spend means that interest rates need to be higher than elsewhere to achieve similar inflation outcomes. The higher interest rates are also needed to fill the domestic savings gap by attracting the savings of foreigners.