and become negatively - sloped during the past few years. “ globalisation and monetary policy ”, march 2007 figure 11 : the change in the yield curve since the beginning of the tightening cycle source : bloomberg figure 12 : new zealand and us long term interest rates source : bloomberg a negatively - sloped yield curve has encouraged borrowers to take out term loans at relatively lower rates. households in particular have favoured fixed rate mortgages, which now account for more than 80 percent of mortgage borrowing, and increasingly for longer terms. this has muted and delayed the impact of policy tightening in this cycle, although we have now seen the effective mortgage rate rise by around 110 basis points since its lows in late 2003. figure 13 : the ocr and the effective mortgage rate source : rbnz a further practical constraint for us has been that, although the twi is influenced by a wide range of global events, in recent years we have not wished to add to upward pressure on the nz dollar. we have also remained conscious of our obligation to avoid unnecessary instability in output, the exchange rate and interest rates, as required under section 4b of the policy targets agreement. this has meant we have been more cautious in our ocr tightening path than might otherwise have been the case. 6. new zealand policy in a global context the circumstances we face at present do not necessarily represent an enduring structural change in the environment in which policy operates. at some stage in the future when the large east asian trading blocs are able to trade currencies and products with the world at more sustainable prices, a significant distortion to our own rate setting process will be removed. however, for that we must wait for g - 7, doha and other international forces to do their work. as for new zealand, we need to see realisation amongst borrowing households and lending banks that this recent period of cheap international money has been unusual, and at some point will revert to more normal financial conditions. that means thinking about other eventualities ahead, and in some cases showing less exuberance. monetary policy always impacts with long and variable lags. those lags have been longer in this cycle, but as household debt grows the ocr becomes a more potent policy instrument. we are continuing to assess alternative measures that might support the ocr, working with the relevant government agencies. these include a tightening of tax rules applying to housing investment and changes to bank capital requirements to help moderate the amplifying effect of credit on the housing cycle.

differential. currency carry trades, whereby investors borrow in low interest rate currencies to invest in higher interest rate currencies, have been some of the most popular. relatively low interest rates in some economies, particularly japan and switzerland, have been used as the basis for a raft of leveraged investments and in so doing have further fuelled global liquidity. figure 6 : global policy rates source : datastream the events of the past few weeks have provided a timely reminder of the importance of low risk aversion and market volatility for the carry trade. fears sparked by a sharp retracement in china ’ s share market and growing concerns regarding the ramifications of problems in the us sub - prime mortgage market saw investors rush to reduce positions in a range of markets. notably, this episode saw currency carry trades scaled back, with funding currencies strengthening and recipient currencies weakening – although the sell - off proved highly correlated across a wide range of asset classes. this period of turbulence has proved relatively contained to date, with risk appetites and markets recovering. but it does demonstrate the potential widespread impact of an increase in risk aversion and market volatility. figure 7 : market developments since the beginning of the year source : bloomberg 4. how does it impact on the nz economy? given our relatively high interest rates, new zealand has attracted a disproportionate share of global liquidity in recent years, putting upward pressure on the nz dollar despite a relatively large current account deficit. these flows have come in many forms. one particular avenue has been the issuance of nz dollar denominated bonds in offshore markets : eurokiwi and uridashi bonds. the derivative transactions associated with eurokiwi and uridashi issuance have provided a mechanism for the new zealand banks to hedge the interest rate and currency risks associated with their offshore borrowings at cheaper rates than would otherwise have been the case. the upward pressure this has put on the new zealand dollar and downward pressure on interest rates has exacerbated the current problematic imbalance between traded and non - traded sectors in new zealand. figure 8 : offshore nz dollar denominated bond issuance ( eurokiwi & uridashi bonds ) source : reuters ; bloomberg ; rbnz but it is important to recognise that the attractiveness of the nz dollar for offshore investors is not just a reflection of the current level of interest rate differentials, but also investors ’ views regarding their sustainability. in