The New Zealand dollar has dropped to a 2 year low versus the US dollar following the central banks decision to keep interest rates low, amongst other global changes such as Turkey’s diminishing currency and the ongoing US trade war.
There is an acceptance that New Zealand is heading towards an economic slowdown and here are some things we need to know about the possibility of a recession.
First of all, understanding why the central bank has decided to keep interest rates low.
What are interest rates?
Interest rates are a way for the central banks to try keep control of the economy.
Low interest rates are put in place to stimulate the public and businesses to spend more money to kick-start the economy. Low interest rates mean you can borrow money and pay less back to your bank/credit card.
Low interest rates are not just helpful for Joe Public but also for the economy. A low interest rate encourages investors from overseas to fund business.
However, low interest rates also result in people borrowing more than needed and people also avoid saving and this can lead to a boom bust cycle.
A boom-bust cycle is explained in this video from Investopedia:
When the economy is doing well high interest rates are implemented. The aim is to discourage spending which can lead to inflation and rising prices. This encourages Joe Public to save more due to higher savings rates. This also ensures people live within their means.
The recent decision to maintain low interest rates in New Zealand comes on the back of a slowing economy. This has been caused by a cooling housing market amongst other factors.
So what should I do with a weak currency/slowing economy:
Become financially resilient:
- work on a 1000$ emergency fund
- avoid unnecessary subscriptions that are not warranted – Most companies allow you to pause your membership.
- can you drop that weekly coffee routine?
- Try a vegetarian day
- Find free activities to do
- Live off one persons income
- Invest in NZ companies who export
- Holiday at home and avoid foreign payments during this time
- Try get rid of debt when you can
These are small steps to begin with to recession-proof yourself.