Confidence Reported at No. 2 The Terrace

In reponse to international coordination between the Federal Reserve & other central banks to boost international liquidity, the Reserve Bank reports it is confident that the New Zealand banking system remains sound despite turmoil in global debt markets upon which New Zealand banks are "relatively reliant".

The Bank says trading banks in New Zealand do not have direct exposures to the financial derivatives instruments that have been the root of much of the financial instability in U.S. and some European markets. Nonetheless, some indirect effects are occurring because of a tightening of liquidity in global debt markets.

To assist in liquidity management, the Reserve Bank is introducting two measures. First, it will begin accepting bank paper in its open market operations. Second, after consultation with the industry, it will acccept certain Asset Backed Securities (ABS) as collateral in its domestic liquidity facilities.

Meantime, Statistics New Zealand reported the current account deficit for the June year 2008 deficit widened to $14.9 billion from $14.2 billion in the year ending in March . By one estimate this is about 8.3 percent of GDP. The increased need for overseas borrowing to cover the deficit in a period of tight international liquidity will likely increase the cost of borrowing and place downward pressure on the Kiwi dollar exchange rate.

Underscoring the demand for liquidity in a cash-strapped US financial system, data released by the Federal Reserve shows US banks borrowing from the Fed at an average of US$47.97 billion a day in the week ending September 17.