More cuts need to lift confidence: Macquarie

Macquarie says the cocktail of very weak growth mixed with deteriorating confidence in the finance company sector presents an extremely challenging environment for even the most robust financial institutions.

Thursday, August 14th 2008, 7:20AM
By its estimates $5.4 billion, or 7% of New Zealanders' disposable household income has been affected by the finance company meltdown.

In a research note Macquarie says this cocktail would be an even more potent mix if it extended to foreign investors, given the country's reliance on offshore funding.

"The best way to resolve this situation would be to ensure that growth does not slide too far.

"The best way to do this is to ease monetary policy conditions."

Macquarie acknowledges a fall in the New Zealand dollar doesn't help on this front, as it doesn't provide much support for the area that needs it most – property.

The Reserve Bank governor, Alan Bollard, has signalled that more cuts to the official cash rate are coming, and the expectation is that there will be 25 basis point cuts at each of the three remaining announcements this year.

Macquarie thinks that the risks to the financial system of the lack of investor confidence provide "a compelling reason to be more aggressive with the rate cuts than is currently factored into the markets."

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