FYI | Sep 22 2008
By Chris Shaw
In the view of TD Securities senior strategist Joshua Williamson there is a chance the Reserve Bank of New Zealand (RBNZ) will make consecutive 50-basis point rate cuts when it meets in October, which would be the first time the bank has made such a move since the official cash rate was introduced in 1999.
Williamson suggests such a move would be justified given the latest developments in the global credit crisis, especially when combined with existing conditions such as the currently high level of funding rates, the nature of New Zealand’s mortgage interest rates where a high proportion of loans are at fixed rates, and that country’s current recessionary environment.
As well he points out the argument for the successive move is that the rescue package initiatives in the US is no guarantee to work and it is unknown whether it will take some time for benefits to flow though, meaning conditions could get worse before they get better.
Domestically there is also an argument for the move, in Williamson’s view, as with spreads moving higher wholesale funding costs for Kiwi banks are coming under more pressure, and the longer these cost pressures impact on the banks the more likely they are to pass these higher costs onto consumers.
One way would be to not pass on the full value of any coming cuts to rates, meaning financial conditions would remain tighter than would be the case in a more freely functioning market. One possible solution for the RBNZ, according to Williamson, would be for more liquidity to be provided to the banks via repurchase facilities. While to date figures show it hasn’t done much of this, the RBNZ is now widening the list of securities it will accept.
Regardless of this change, Williamson expects the RBNZ to again cut interest rates by 0.50% in October as economic growth in the second quarter is likely to be lower than the market had expected, which he notes would mean a deeper recession and longer recovery period than had previously been factored into forecasts.
Beyond this cut, which would put the official cash rate at 7.0%, Williamson sees additional cuts to bring the rate to 6.5% by the end of the first quarter in 2009.
