The Reserve Bank acted yesterday to ensure there is sufficient ready cash in New Zealand's financial system to prevent it grinding to a halt as a result of the continuing credit crunch.
Governor Alan Bollard said there was "no immediate problem," but the RBNZ "always stands ready to support the liquidity of the New Zealand financial system".
Central banks around the world have pumped billions of dollars of additional capital into money markets to ensure they do not freeze up as result of the turmoil this week on Wall St.
The Reserve Bank has so far not seen a need to take such strong steps but yesterday broadened the range of debt securities it would accept from banks as collateral on the short-term loans it provides them as part of its daily operations.
The RBNZ will also offer longer terms of up to six months "in order to help ease pressure at the short end of the market," it said .
New Zealand banks' borrowing costs rose to the highest since March, according to a gauge that measures the availability of funds in the market.
Policymakers globally are trying to revive confidence in markets as investors stockpiled money on concern more financial institutions would fail after the bankruptcy of Lehman Brothers and the US Government bailout of American International Group this week.
The world's biggest central banks joined forces to pump US$180 billion ($266.4 billion) into money markets yesterday to ease the credit squeeze.
The US Treasury Secretary and Federal Reserve chairman yesterday proposed moving investment banks' "toxic" mortgage debt into a new institution.
The move helped to spur a rebound in markets in New Zealand, Australia, Hong Kong, and China.
New Zealand "will inevitably feel the effects of major financial shocks such as this," Dr Bollard saidyesterday.
"There are indirect adverse effects on liquidity in New Zealand's financial markets."
The premium in addition to basic official rates that banks are charging each other for three-month loans widened to 0.625 of a percentage point yesterday, a more than 50 per cent increase on the median spread over the past 12 months.