There Is No Depression in New Zealand - Reserve Bank

The Reserve Bank Governor Dr Alan Bollard chopped the official cash rate from 6.5 percent to 5 percent on Thursday, the lowest level for five years.

In perhaps the "famous last words" category, Dr Bollard pronounced that "We believe the recession has ended and we will have positive but low growth for the next four quarters."

He then jawboned trading banks to "share the pain" and pass on the interest rate cut to their household and business customers and to keep advancing loans in tight conditions.

Banks responded by passing on some of the rate cut but not the full 150 points.

Trading bank economists think the worst is not yet over and that a 100 basis points cut in the OCR is possible at the next review in late January.

The major export markets for New Zealand are now contracting at a faster rate than previously estimated and the drop off in demand is likely to make the Reserve Bank's pronouncement that there is no longer a recession in New Zealand a mockery.

Should things get worse, Dr Bollard says the Reserve Bank has "a lot of ammunition in this box" to cut interest rates.

A pity the Bank didn't look around hard enough in that box for a tool (other than ammo) to squeeze the speculative bubble out of the New Zealand housing market a couple of years back. At the time it seemed the Reserve Bank was standing around saying it's all very terrible but we can't think of anything we can do about it.

More of the same inertia was exhibited in the recent deposit insurance policy fiasco when New Zealand got backed into a scheme because Australia had announced back in mid year it was going to pass legislation instituting its own scheme.

Did no one at No. 2 The Terrace think then that New Zealand would likely have to act to stem a tide of deposits following workers across the Tasman? Or that global financial meltdown would precipitate the conditions where New Zealand would be compelled in an open economy environment to match competitively overseas deposit insurance schemes?

Ideology rather than clear thinking still seems to guide policy in Wellington. And it's not just limited to the Reserve Bank.

So with apologies to Blam Blam Blam, 80s Kiwi rock band: There Is No Depression in New Zealand, Dr Bollard...

New Zealand Government Issues Wholesale Funds Guarantee as Election Nears

The New Zealand government has moved to provide a guarantee on wholesale funds in the financial system. The objective is to assist the re-entry of New Zealand financial institutions into foreign currency-denominated international lending markets but will also be available to cover NZ dollar denominated debt. Press statement here. Operational guidelines here.

Financial institutions will have to opt-in to the scheme by institution and by debt instrument. Issuers will be required to disclose whether or not particular paper is government guaranteed.

Only institutions with an investment grade credit rating of BBB- or better will be permitted to use the facility. The wholesale guarantee will only be available to financial institutions and not to corporate or municipal issuers of paper. The guarantee will only be available for up to 125 percent of an institution's total stock of eligible types of debt on issue prior to the intensification of the global financial crisis, dated to 12 October 2008.

Only paper issued in NZD, AUD, USD, EUR, GBP, CHF, JPY, HKD, and SGD currencies will be covered.

Guarantee fees will be charged on the basis of the particular financial institution's credit rating. Dr Cullen, Minister of Finance, estimates that the fees could raise NZ$1 billion which will be set aside as a fund to cover the guarantees in event of defaults.

The scheme will be continued until financial market conditions return to "relative normality for a sustained period" but given the nature of the international financial crisis "the guarantee scheme is likely to continue to be offered for some time."

Together with the US$15 billion currency swap arrangement with the US Federal Reserve announced mid-last week, the wholesale guarantee scheme should act to underpin the short term fund raising undertaken by New Zealand's trading banks in international markets.

Reserve Bank Approves Purchase of Mortgage-Backed Securities from Two Banks

The Reserve Bank has agreed to purchase NZ$8.7 billion of residential mortgage-backed securities from the ANZ National and Westpac banks should they require a liquidity injection.

Tightening liquidity in New Zealand does not stem from problems with domestic residential mortgage-backed securities since the problems of US-type sub-prime lending have not been permitted to occur in New Zealand. The problem, however, is in banks re-financing their needs in global financial markets where credit has become extremely tight. The parent companies of the major trading banks in New Zealand, headquartered in Australia, have, however, been writing down bad loans in recent quarters.

In early May this year, the Reserve Bank expanded its lender of last resort facility to trading banks by permitting residential mortgage-backed securities to be posted as collateral in return for Reserve Bank loans.

Reserve Bank Chops OCR Interest Rate by Full 1 Percent

Comparative Central Bank Interest Rates - New Zealand, Australia, United States
Fairfax Media

Reserve Bank Governor, Alan Bollard, has chopped the Official Cash Rate by a full one percent to 6.5 percent in his October review of monetary conditions. It was the single largest cut in the rate since the OCR was introduced in 1999. The OCR is the rate at which the Reserve Bank lends to or borrows from the NZ banking system.

With the increasing impact of the global economic crisis showing up in New Zealand's domestic recession in the form of weakening export demand, the Reserve Bank's hand was forced into a large cut. Market sentiment is that a further 0.75 percent can be expected in the next few months.

Domestically, the weakening of the housing market, tightening credit, a decline in Fonterra's payout to dairy farmers next year, and increasing unemployment are combining to shift the Reserve Bank's concern to offsetting weakening demand from inflation control as price increases are moderating.

Inflation Surges as New Zealand General Election Nears

New Zealand's inflation rate, as measured by the consumer price index, spiked 1.5 percent in the September quarter.

The annual rate inflation is now 5.1 percent, clearly above the level of the inflation target of 1 to 3 percent over the medium term incorporated in the Policy Targets Agreement between the Minister of Finance and the Governor of the Reserve Bank.

Of course, the medium term inflation target has become secondary in the short run to the policy objective of combating the current economic recession and maintaining the stability of New Zealand's financial system in the present global crisis.

Inflation is expected to moderate as the global recession feeds through into the New Zealand economy and as oil prices in particular fall. Offsetting this trend may be the depreciation of the Kiwi dollar but importers will be under pressure to shave profit margins instead of passing on rising costs as domestic demand weakens.

New Zealand Banks Flock to Deposit Insurance

As expected, the major trading banks have flocked to sign up for the New Zealand government's deposit guarantee scheme that will cover the deposits, without limits, of banks, building societies, credit unions, and finance companies for the next two years.

ANZ-National, BNZ, ASB, Westpac, TSB, SBS Bank and Government-owned Kiwibank have all indicated they will sign up. Only institutions with deposit liabilities in excess of $5 billion are required to pay a fee for the guarantee. That fee will likely run at around $15 million for most of the larger insitutions. The fee structure does not allow for any risk-based pricing.

The scheme is being criticised because it affords finance companies that have engaged in riskier behavior than other financial institutions the same level of protection without an associated hike in the insurance premium they pay. Moreover, finance companies that have gone into receivership because of mismanagement in the last few years could be revived, and if found to be in compliance with their trust deeds, eligible for new deposit insurance coverage. Reserve Bank Governor, Alan Bollard, has confirmed this but also pointed out that deposit insurance is not retrospective - it does not cover deposits lost in financial collapses prior to introduction of the guarantee.

As for the two year limit on the deposit guarantee, it would be a brave, some might save foolhardy, government that sought to remove the guarantee at the end of two years, even in prosperous economic times. It would likely have the same destabilising effect as the removal of wage and price controls has: despite all assurances, it could be expected that depositors would engage in flight to a safer haven for their funds.

Roundup on the Economic Crisis

Former Governor of the Reserve Bank & former Leader of the National Party, Don Brash, on the current global financial crisis, its impact on New Zealand, monetary policy settings, deposit insurance, and fiscal policy.

The second interview is with John Yeabsley, Director of the New Zealand Institute of Economic Research, the premier economic research institute in the country, on the Institute's latest set of forecasts and business survey.

Video is from the TVNZ breakfast show, October 8 or 9, 2008.

A virtual chocolate fish or buzz bar for the first commenter to identify who the figure is looking over Don's shoulder...

Manufacturers Call for Deposit Insurance in New Zealand

Echoing some of the policy changes called for on this blog in recent weeks, the New Zealand Employers & Manufacturers Association (Northern) has called upon the Reserve Bank to do the following:

"While the recent tax cuts will help, the Reserve Bank now needs to:

* Cut the Official Cash Rate (OCR) by at least one percent;

* Ensure NZ banks have access to sufficient Reserve Bank credit to ensure responsible lending can continue;

* Reassure business, depositors and lenders that our banks are safe and fully able to keep on lending.

"The Government needs to assure depositors that, should it be required, it will guarantee them even though all our banks are rated amongst the top 26 in the world.

"Now is not the time to maintain and overly narrow focus on inflation. Restoring confidence to ensure the recession does not deepen must take priority."

Friday, 10 October 2008, 10:15 am
Press Release: Employers And Manufacturers Association

Reserve Bank of Australia Slashes Interest Rates

The Reserve Bank of Australia cut its official cash rate a full percentage point to 6.0 percent overnight in response to tightening domestic credit conditions and stock market volatility brought on by the global financial crisis. It was the RBA's largest cut since 1992 and stunned financial markets because of the abrupt U-turn in Australian monetary policy.

Reflecting tight credit conditions, Australia's major banks only passed on 80 basis points (0.8 of the 1 percent cut) to their variable home loan rates.

Australia's OCR cut comes later than the two in New Zealand in recent months, but the Australian cut will intensify pressure on the Reserve Bank of New Zealand to cut its OCR further.