Alan Bollard says NZ's banking system is working well. Photo / Mark Mitchell
The Reserve Bank won't make an early cut to its interest rate, but is taking action to ease movement of money in the financial system.
Governor Alan Bollard yesterday ruled out an early review of the official cash rate, saying the New Zealand financial system was working satisfactorily
and moves to help it over the past year had been "sufficient at this stage".
The bank is due to review the cash rate on October 23.
South Korea, Taiwan and Hong Kong slashed interest rates yesterday, joining other central banks around the world as they fight the global financial crisis.
On Wednesday night, the US Federal Reserve, the European Central Bank, the Bank of England and central banks in Sweden, Canada and Switzerland cut interest rates by half a percentage point.
China cut its rate by 27 basis points.
While Dr Bollard decided against a cut, he announced measures aimed at improving liquidity in the financial system.
The Reserve Bank will temporarily relax its rules and lend money to trading banks on the basis of fully secured residential mortgage-backed securities.
Money market dealers said there had been no problems in the daily settlement process between banks and the Reserve Bank, but the move was useful.
It means that if there are problems, banks can use a wider range of securities in their dealings with the central bank.
They can bundle their mortgages into securities to create a tradeable instrument.
The move may seem surprising, as securitised instruments were one of the problem areas in the United States.
But mortgages are of a much higher quality in New Zealand - meaning the risk of borrowers defaulting is much lower than it has been in the US.
The bank's decision not to cut the cash rate drew a mixed response.
Goldman Sachs JB Were economist Shamubeel Eaqub described it as extraordinary and said New Zealand could not operate monetary policy in isolation.
"What do the other central banks in the world see that the Reserve Bank does not?" he said.
"The Reserve Bank should be cutting interest rates, trying to shore up the economy and prevent a big blowout in joblessness," Mr Eaqub said.
The bank had been handed the opportunity to act "on a plate".
UBS senior economist Robin Clements said the decision not to cut the cash rate was perplexing.
"I can't see how one can argue that we don't need lower rates, and if you're going to do it on the 23rd ... well, why not do it now?"
He said that at the very least the bank could have reduced its interest rate by 50 points like the other central banks, and then reviewed that on October 23.
But Westpac economist Dominick Stephens supported Dr Bollard's decision.
He said interest rates were being cut not only because of the economic situation, but also to shore up confidence.
"In New Zealand there is no crisis of confidence in our banking system, therefore why go early?
"By moving between meetings [Dr Bollard] could cause people to think, 'Well hang on, has the Reserve Bank of New Zealand got cause to panic outside of just the bigger picture of economic deterioration?"'
All the economists agreed that if the bank did lower its rate on October 23, it should do so by 100 basis points or one percentage point.
The Reserve Bank of Australia cut its rate by 100 points on Tuesday. But although it was a bigger cut than expected, it was made on the regular scheduled date.
National Party leader John Key said it was up to the Reserve Bank to move interest rates, but he felt a cut was needed sooner rather than later.
He advocated a minimum cut of 50 points, "and you can't rule out a bigger cut".
"The sooner interest rates come down, the sooner we take the pressure off businesses in New Zealand," he said.
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