Central bank action fails to fire up NZX

A rally on the New Zealand market was short-lived yesterday after central banks around the world took coordinated action to ease strain on the world's financial system.

The US Federal Reserve, European Central Bank, Bank of England and the central banks of Canada, Japan and Switzerland took part in a plan to make it easier for banks to get dollars, reducing the cost of temporary dollar loans to banks.

"The purpose of these actions is to ... mitigate the effects of strains on the supply of credit to households and businesses and so help foster economic activity," the banks said in a joint statement yesterday.

The announcement came hours after China reduced bank reserve levels to release money for lending and help shore up slowing growth. It was the first easing of Chinese monetary policy in three years and higher growth in China could be crucial for a suffering global economy.

Foreign stocks surged following the news. The Dow Jones industrial average jumped more than 400 points and was up 392 an hour after the opening bell. Germany's DAX closed 4.9 per cent higher, France's CAC was up 4.2 per cent, the euro rose 1.1 per cent to US$1.3463 and oil was up US$1.45 to US$101.25.

In Asia, Japan's Nikkei 225 Index climbed 2.1 per cent in afternoon trading, Australia's S&P/ASX 200 gained 2.6 per cent and Hong Kong's Hang Seng jumped 5.6 per cent in late trading.

However, the NZX was up only 7 points, or 0.2 per cent, at 3277.31 yesterday, after early improvement faded by the afternoon.

"It's pretty disappointing for the local market that there's not a lot of conviction buying going on and the concern is that it was a one-day wonder overseas," said Grant Williamson of Hamilton Hindin Greene.

"It's a big concern the big rallies overseas are a knee-jerk reaction and the next day it will be back to worrying what's going to be happening next."

Kevin O'Sullivan, director of derivatives and commodities at OMF, said that while the NZX didn't surge yesterday, it had not dipped as low as other markets this year.

"We're only down year-to-date 1 per cent so we're one of the best performers. The only index of any significance which is up is the Dow Jones by 4 per cent year-to-date."

O'Sullivan said the bank's deal was a "significant development" and globally "it was a very positive day".

But New Zealand Institute of Economic Research principal economist Shamubeel Eaqub said the banks' intervention was similar to actions taken leading up to the global financial crisis three years ago. "It's a sign things are very wrong," he said.

As the central bank action made it easier to borrow US dollars, the NZ dollar picked up against it and surged by around 2c overnight Wednesday, Williamson said.

The kiwi rose to US78.22c and closed yesterday at US77.80c.

Central banks around the globe agreed to reduce the cost of temporary dollar loans they offer to banks - called liquidity swaps - by a half percentage point. The lower rate will be applied to all central bank operations next week.

The cut means the charge will fall to 50 basis points or half a percentage point over an international benchmark, the overnight index swap rate, which is averaging around seven to 10 basis points.

Non-US banks need dollars to fund their US operations and to make dollar loans to companies needing US currency. The dollar is the main currency for central bank reserves and is used for international trade.

The central banks are also taking steps to ensure banks can get ready money in any of their currencies, if market conditions warrant, by establishing a temporary network of reciprocal swap lines.

Now there's no need to offer non-domestic credits in currencies other than the dollar, the central banks said, but they "judge it prudent" to get such an arrangement in place ahead of time.

Fears of more turmoil have already left some European banks dependent on central bank loans to fund their daily operations as other banks won't lend to them. Such constraints can hurt the economy by cutting money available to lend to businesses.