Sludge #187: Bollard Talks About The Credit Crunch

Thursday, 23 October 2008, 10:56 am
Column: C.D. Sludge

A very brief statement from the Reserve Bank Governor Alan Bollard this morning was followed by an unusually long and wide ranging press conference in which the Governor explained in some detail the NZ Central Bank's response to the current global financial crisis.

Towards the end of the 27 minute conference Dr Bollard explained that in his and the Bank's opinion - and in the view of those he was dealing with offshore - recent events were definitely nothing like 1929. What was happening was more a nasty financial sector moment than a hugely significant economic event.

NZ's economy was expected to have low and slightly negative growth for a while - but was not expected to fall into depression.

Dr Bollard's regular OCR (official cash rate) update does not usually include a press conference.

In this case as an OCR update is not accompanied by formal presentation of economic forecasts most of the meat in today's announcement came in the press conference.

The bank's 1 percent official cash rate reduction today is very much a steady as it goes response to the second month of the most severe financial crisis since 1929 (albeit in the bank's opinion not an economic crisis of anywhere near that magnitude.)

"Ongoing financial market turmoil and a deteriorating outlook for global growth have played a large role in shaping today's decision," Dr Bollard says in his statement.

The Bank's full 1 percent (100 basis point) cut in official rates takes the NZ wholesale interest rate to 6.5%. This is the largest move (either up or down) since the OCR was introduced in 1999. It is already fully priced into markets and will therefore not scare the horses.

It is notable that the NZ move has come on a regular OCR review date after most of the world's central banks moved in a coordinated fashion with an emergency cut in rates two weeks ago.

In taking its time and acting carefully the bank appears to be signaling in this that the NZ banking environment is not suffering the same exposures and problems which are impacting over the rest of the globe.

In answer to questions in the press conference the Bank Governor said he did not think the freeze in global credit markets was having an impact on bank liquidity in NZ at present and that at least as far out as Christmas NZ banking liquidity was not an issue.

The Governor said that the market it had itself put in place to enable it to lend to NZ banks in return for securitised mortgage backed securities was open for business but would not say how much - if any - money had been advanced to banks so far. The Governor went so far as to say that if we wanted that information we would have to ask the banks directly.

Business and home owners may be expected to continue to wonder whether the bank's move is fast enough given the ongoing depth of the global crisis.

Among the immediate questions will be whether the lower rate results in immediate cuts to fixed and floating mortgage rates in the retail banks.

So far only NZ Government owned Kiwibank has been passing on fully recent cuts to official rates. Today's response to the largest ever cut in official interest rates will be interesting.

Also top of mind will be anecdotal evidence of commercial lending stopping from many of NZ's Australian owned bank subsidiaries being stopped. The proposed purchase of Silver Fern Farms is now just one of many transactions which are believed to be running into difficulties.

Dr Bollard did not delve directly into this issue when asked to comment on it except to say that there were stories of such things out there.

At present even after today's cuts NZ's official interest rates at 6.5% remain much higher than our trading partners. Dr Bollard indicated that he would be expecting to cut further and relatively soon - warning only that "domestic cost pressures" would need to be seen to be abating too. He specifically cited electricity costs as being one of the domestic cost centers they were watching but refused to be drawn into a discussion of whether it would be appropriate for the Government to direct its electricity SOEs to cut electricity prices.

In his statement Dr Bollard says the previously serious risks around persistent inflation have now largely abated due to low growth expectations and sharply lower oil prices.

"Annual CPI inflation will return to the target band of 1 to 3 percent around the middle of 2009".

The main drivers of today's cut are expectations of reduced export returns and limited availability to credit. "In this environment consumers and businesses are likely to be more cautious and curtail spending."

Dr Bollard was not overly concerned at the falling NZ Dollar and said he expected that in the medium term fundamental economic considerations would guide the direction of the dollar.

• Scoop Audio (27 Minutes): Governor Dr Bollard's Q&A contained several questions around what the bank is expecting from retail banks and on whether additional measures ought to be put in place to restart commercial lending. He was asked about how the briefing processes involving the opposition and incoming government was working and would work. He was specifically asked about his views on the domestic and wholesale guarantee schemes. At the conclusion of the press conference he was asked whether he thought it would be useful for Kiwibank to move more into the commercial lending space, a question he declined to answer.

This morning's press conference in pictures

Click for big version

Click for big version

Click for big version

© Scoop Media

Alastair Thompson

Scoop Publisher

Alastair Thompson is the co-founder of Scoop. He is of Scottish and Irish extraction and from Wellington, New Zealand. Alastair has 24 years experience in the media, at the Dominion, National Business Review, North & South magazine, Straight Furrow newspaper and online since 1997. He is the winner of several journalism awards for business and investigative work.

Contact Alastair Thompson

• Linkedin
• Twitter - @althecat
• Facebook
• Email - alastair@scoop.co.nz