10 Oct 2008

NZ financial system 'at risk'

5:57 am on 10 October 2008

There are calls for the Reserve Bank to cut interest rates, with one economist warning the New Zealand financial system is at risk.

Some markets have already factored in a big cut to the Official Cash Rate by the Reserve Bank after six central banks worldwide cut interest rates by half a percentage point.

The US Federal Reserve, the European Central Bank, the Bank of England and central banks in China, Sweden, Switzerland and Canada on Wednesday cut their benchmark rates on Wednesday.

The Reserve Bank of Australia cut its rate by a full percentage point from 7% to 6% on Tuesday. So far, New Zealand's central bank has not followed suit.

National Party leader John Key on Thursday called on Reserve Bank Governor Alan Bollard to cut interest rates by at least half a percent sooner rather than later.

Mr Key said the action was needed to help offset the effects of turmoil on international financial markets and for the sake of the banking system and the New Zealand economy.

However he concedes it is ultimately the Mr Bollard's call.

The Reserve Bank Act of 1989 gave the Reserve Bank full operational independence.

Earlier, Goldman Sachs JB Were senior economist Shamubeel Eaqub said a cut in rates needed to happen or New Zealand's otherwise healthy banking system could suffer.

Mr Eaqub said balance sheets are pretty good but the banks are having what he called "terrible difficultly" in raising funds and getting access to funds.

He said the situation remains very grave for the banking system and the Reserve Bank needs to act promptly.

The Official Cash Rate is currently 7.5% after being lowered by half a percentage point on 8 September. The Reserve Bank previously reduced the rate from 8.25% to 8% on 24 July. It was the first cut since July 2003.

Bank rules on loans relaxed

The Reserve Bank on Thursday fast-racked moves to enable banks to borrow money from it as funds from overseas money markets dry up.

The move eases funding pressures on local banks by relaxing requirements for loaning the banks cash.

Trading banks have been struggling to raise money on foreign money markets.

In May, the Reserve Bank said it would accept residential mortgages as collatoral if the mortgages were rated by a credit rating agency, but will now abandon that requirement.