Reserve Bank rules out early rate cut

The Reserve Bank has ruled out an early cut in interest rates.

All eyes in the New Zealand market have been focused on Alan Bollard today with just one question in mind - will he cut today. The New Zealand dollar has had once of its most volatile days ever, again taking a severe battering from international investors overnight, which has tightened the pressure on him.

But Bollard has just announced some more measures aimed at improving the liquidity of the market and says these will be enough at the moment. He reiterated that the next scheduled review of interest rates is October 23.

Shortly after the announcement came out the under siege dollar slumped by over half a cent against the American currency. A short time ago it was worth US59.2c.

Bollard said today that the Bank is monitoring international developments very closely.

"At the moment the New Zealand financial system is working satisfactorily. It has held up relatively well in the face of the volatility and disruptions that we are seeing internationally," he said.

"New Zealand banks have high-quality assets. Fortunately they do not have the poor quality assets that have proved so damaging overseas."

Bollard said that over the past year the Bank has announced a number of measures that will make it easier for financial market participants to maintain liquidity during a period of financial market disruption.

"To further improve liquidity prospects for the banking system, we are announcing that the Reserve Bank will temporarily broaden its security programme. We will, if required, be prepared to lend on the basis of fully-secured Residential Mortgage-Backed Securities (RMBSs), prior to those securities achieving formal ratings."

He said there has been good progress by institutions in developing RMBSs should they be needed.

"While we believe these measures are sufficient at this stage, the Bank retains a number of other regulatory powers. We are committed to ensuring the ongoing health of the financial system and remain ready to respond as appropriate.

"The centre of the financial crisis is in the United States and Europe and, while there will be ramifications for our economy, the next review of monetary policy is scheduled on 23 October.

"In the meantime we are staying in very close touch with the banks, and also with the Government."

Bollard's move comes amid continued turbulence in financial markets. At one point last night the Kiwi slipped to a five-year low of US57.85 cent against the American currency.

That compares to 5 pm yesterday when our currency was buying US62.45.

In moves described by BNZ currency strategist Danica Hampton as "dramatic" the Kiwi dollar has swung around wildly in the past 24 hours.

It has moved in value by some 8.4 percent against the US dollar during that period - when measured from the top of its value to the bottom point of US57.85. That's the second-largest price range the dollar has moved in since 1985, when it moved an amazing 16 percent in one day.

The concern within New Zealand now will be that the currency has fallen so fast that importers will face considerable increases in the cost of goods.

Potentially this could fuel our already high inflation rate - which the Reserve Bank is expecting to peak at about 5 percent this year.

All of this places huge pressure on Reserve Bank Governor Alan Bollard to act.

Overnight Bollard saw his colleagues from seven of the world's major central banks take unprecedented action, cutting interest rates in unison - they have done so in an attempt to half the panic on world financial markets which has thrown the world into the worst financial crisis since the Great Depression.

The banks that acted are

US Federal Reserve: 0.5 percent 

Bank of England: 0.5 percent

European Central Bank: 0.5 percent

Canadian Central Bank: 0.5 percent

Swedish Central Bank: 0.5 percent

Swiss Central Bank: 0.5 percent

Chinese Central Bank: 0.27 percent

 This of course follows the move by the Australian Reserve Bank on Tuesday which slashed its cash rate by a full percent - normally reserve banks only move a quarter of a percent.

Bollard knows the if he cuts the rate it will help householders with mortgages, assist in bringing calm to investors and help a rapidly sagging economy. But his first priority is inflation and the falling Kiwi dollar risks spiking import costs.

However, as the Japanese sharemarket began its biggest fall since 1987, so the selling pressure came in, and this only increased once European markets kicked in.

BNZ currency strategist Danica Hampton said some support for the Kiwi returned after central banks around the world cut interest rates. A short time ago the Kiwi was back up at US60.3c - but sill two cents down from yesterday.

Hampton said the market's focus today was whether the Reserve Bank here would follow with an immediate rate cut.

Hampton thought the immediate prospects for the Kiwi dollar was for some recovery, though it was unlikely now to get any higher again than about US64c. Any further moves by the dollar to around US58c would be seen by Kiwi exporters as attractive and this was likely to provide a bottom level support for the currency.

- © Fairfax NZ News