New Zealand central bank boosts banking liquidity for second time

WELLINGTON: New Zealand's central bank announced further measures to boost liquidity in the banking system Wednesday, saying the country's economic slowdown could intensify if credit market conditions tighten further.

Reserve Bank Governor Alan Bollard said the local financial system had so far withstood the ``severe test'' of global financial market but that it was prudent to ensure sufficient liquidity in case disruptions intensify.

New Zealand banks have little exposure to offshore credit risk, but Bollard said the banks have been affected by the global tightening in liquidity and availability of funds.

``They are facing a higher cost of funds and reduced liquidity in some markets and this has flowed through to higher borrowing costs for businesses and households,'' Bollard said in the bank's twice-yearly financial stability report.
He said there is a risk local banks could tighten credit conditions too much, exacerbating the economic slowdown in New Zealand.

Bollard also said the slowdown under way in the New Zealand economy partly reflects a weaker global outlook, particularly evident in the domestic housing sector.

The governor last month acknowledged there was significant downside risks to economic activity. Financial markets interpreted that as a softening in the bank's long-held hawkish stance, providing an opening for interest rate cuts to occur late in 2008.

The central bank raised its key interest rate four times last year to its current 8.25 per cent, where it has stayed since July 2007 even as the US Federal Reserve embarked on an aggressive easing campaign to stave off a harsh landing for the US economy.

New Zealand's annual inflation is currently running above the Reserve Bank's target of 1 percent to 3 per cent the main stumbling block to rate cuts.

The new liquidity measures include extending the range of securities eligible for acceptance in the central bank's domestic liquidity operations to include residential mortgage backed securities and AA rated government sector debt.
The moves follow measures introduced last September to ease the impact of the international credit crunch.

Bollard also said the New Zealand dollar remains high relative to its long-term average and there is a risk of a sharp fall. The New Zealand dollar, trading locally at US$0.7915 before the announcement, eased back to $0.7899 afterward.

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