The Reserve Bank says it is ready to intervene to help banks increase liquidity during the current international financial crisis.
The bank's governor, Dr Alan Bollard, says global market turmoil is having an adverse effect on liquidity in New Zealand, but the country's banking system remains sound.
The Reserve Bank has announced two new measures to improve liquidity: allowing bank paper to be used in daily market operations, and accepting asset-backed securities as collateral in domestic operations.
The head of research at the Bank of New Zealand, Stephen Toplis, says the banking system is suffering from the global finance fallout and is poised to pass on costs.
But he says the Reserve Bank wants interest rates to fall, and realises that the best way to do that is to improve liquidity in the market.
Earlier on Friday, the Reserve Bank followed the lead of the world's major central banks and offered $200 million of short term loans to banks in New Zealand.
But New Zealand banks only took up $50 million of the offer, which economists took as a sign that local banks are not short of cash.
Six of the world's major central banks released $US180 billion to lift the amount of credit in financial markets on Friday, in a bid to calm panicky investors.
Central banks from the UK, US, Europe, Canada, Switzerland and Japan are releasing the funds into their money markets.
The move is the fourth such concerted effort since the onset of the credit crisis last year.
The Reserve Bank last week said it was cutting the Official Cash Rate by a greater-than-expected 0.5% because it wanted to see mortgage rates come down.
The ANZ Bank's Cameron Bagrie said on Thursday an emergency cut in the Official Cash Rate before the next review on 23 October is becoming more likely.
Dr Bollard says the ructions playing out on global markets will inevitably be felt by New Zealand banks, which get up to a third of their funding from offshore lenders and face higher interest rates for that borrowing.
But Dr Bollard says local banks are not involved in the complex financial transactions that are behind significant losses among banks overseas.
He says the Reserve Bank is working on alleviating the crisis by accepting a wider range of collateral from local banks in exchange for loans.
Reserve Bank needs greater powers, says committee
A Parliamentary select committee on Thursday recommended the Reserve Bank governor be given more powers to control inflation by keeping money out of circulation.
The select committee has spent 18 months investigating ways of giving the Reserve Bank additional tools other than interest rates to control inflation.
It says the Reserve Bank governor should be given more power to regulate the amount of money that banks are required to keep as prudential reserves at times of high inflation.
The National Party rejected the idea, saying that during a credit crunch the economy needs more money in circulation, not less.