Cash rates sliced in NZ

There's some relief for borrowers in New Zealand and perhaps even more relief for banks, which may get to restore interest margins, following the decision of the Reserve Bank of New Zealand this morning to reduce the official cash rate to 3.5 per cent from 5.0 per cent.

The global recession and very poor conditions among New Zealand's trading partners mean that the RBNZ now considers inflation to be abating and will fall back within the target range of between one per cent and three per cent.

The RBNZ announcement included a paragraph aimed at decision makers at banks: "To ensure the response we are seeking, we expect financial institutions to play their part in the economic adjustment process by passing on lower wholesale interest rates to their customers. This will help New Zealand respond flexibly."

Not that banks in New Zealand, like their owners in Australia (for the most part) and like banks in many other markets are likely to pass through all that much of the rate cut, especially to business borrowers.

At a media conference in Wellington this morning Alan Bollard, the governor of the RBNZ, acknowledged that banks were in a difficult position.

Even with the use of Australian, rather than New Zealand, government guarantees to maintain access to offshore debt markets banks are paying elevated spreads (of roughly 100 basis points) over the cash rate for wholesale funds.

The steep cut in the cash rate is no doubt an effort to make sure that business and residential borrowers receive real rate relief, even if the reduction is less than 150 basis points as banks take the opportunity to improve margins.

Noting that "these are not Muldoon days" Bollard said the RBNZ did not tell banks what interest rate levels to set.