Bollard - Doomed to Fail

So Allan Bollard has decided to intervene in the foreign exchange market. It takes me back to 1992.

The then UK Chancellor of the Exchequer bet the house to keep Britain inside Europe's Exchange Rate Mechanism (ERM). He failed and George Soros, amongst others, betting against the pound, walked away with a cool 2 billion GBP profit. The day became known as 'Black Wednesday'.

At 5.00pm that day, a group of friends and myself met at The Crusting Pipe in Covent Garden. By 5.15pm, interest rates had hit 25% as the Chancellor's gamble failed. We ordered what we thought might be our last bottle of champagne ever. Repossession and bankruptcy were sure to follow. By 7.00pm the nightmare was over. Britain had exited the ERM and interest rates were back to normal. We ordered a second bottle.

Central bank intervention rarely works long term. The RBNZ does not have a lot to play with and is betting in some way against its own high interest rates. These will prove more damaging to the NZ dollar long-term and with it, the hopes of exporters. Yesterday's intervention is doomed to fail.