Bank liquidity requirements could keep rate hikes to a minimum

Reserve Bank of New Zealand Governor Alan Bollard says new liquidity rules for lenders, which come into effect in April, will restrict their access to cheap wholesale funding, helping damp credit growth and reducing the need to hike interest rates to cool the economy.

"We believe that the new liquidity policy, and in particular the core funding ratio, could usefully contribute to the monetary policy task by limiting the banks' ability to fuel credit growth using cheap and plentiful short-term wholesale funding during boom times," Bollard told employers in a speech in Christchurch.

The ratio could automatically stabilise the economy in upturns, and "reduce the required hikes in the OCR" during these periods, he said.

Under the changes, lenders must maintain a core funding ratio of 75% - that's the retail deposit base and longer-term wholesale funding as a percentage of assets. According to central bank reports, the nation's banks have had an "unusually high" proportion of their international debt securities maturing within one year compared with other developed countries.

The core funding ratio is designed to ensure a higher proportion of stable funding, and a reduced reliance on short-term offshore funding, according to the RBNZ. The financial crisis highlighted the vulnerability of the New Zealand banking system to a severe global liquidity shock, drying up the availability of short-term fund globally.

Bollard is expected to begin hiking the official cash rate in April, according to a Reuters survey, after he held rates at a record-low 2.5% yesterday, even as he played down his earlier pessimism over the exchange rate and dwindling exports from previous statements.

Bollard repeated his plea to policy makers to cut back on government spending, saying the removal of fiscal stimulus would ease the pressure on monetary policy, and also called for action on the country's tax structure.

Prime Minister John Key has promised an overhaul of the tax system in New Zealand, saying he wants it to be "world class," but has been coy on what initiatives he will introduce to achieve this.

Bollard said he wants to "minimise tax-fuelled property investment and consumption that might detract from more balanced savings and growth" - two things he's pegged as vital for the economy to achieve sustainable growth after it dragged itself out of its worst recession since 1991 last year.

Bollard said he had problems reining in the property market before, which was "exacerbated by a tax system which favoured investment in housing." House values recovered much of their value last year after tumbling in 2008 from a peak a year earlier.

Still, economists predict this has been overstated, with vendor sales and mortgage approvals weak, while the number of new building consents issued last month fell a seasonally adjusted 1.4%, according to government data.

Comments from our readers

On 3 February 2010 at 3:28 pm Andy Phillipson said:

For goodness sake Bollard, will you stop bleating on about the same old problems, and actually make some realistic observations. Property investment is extremely important to the economy as a whole. Secondly, you will never encourage a savings ethic when there is no need to save - Finance companies that tout ridiculous hire purchase contracts are a far easier option for consumers, and they artificially stimulate the economy. Why not instead stop finance company hire purchase contracts and leave the lending to the banks? As well as giving consumers a reason to SAVE for the goods they need, this will reduce our dependency on credit, and improve the liquidity of banks and the general public. On top of that, there will be less likelihood of bad debt and credit fraud because banks will have knowledge of prior credit history and current debt servicing abilities. Gone would be the days of going to several retail stores in a day and loading up with appliances on credit, regardless of income and other financial commitments.
It is clear to me that not everyone has the ability to fully understand the causes or consequences of financial over commitment. In short Mr Bollard - take away the easy options, and bring back the days of economic sacrifice and realistic opportunity cost! That will cure your savings dilemma.
Leave the rental market alone - people will always need a place to live, at a realistic price. If they can't afford to own their own home, they will need to rent - that means you will need landlords. Investors will only be landlords if there is a suitable return for the risk. If the equation doesn't stack up it will be put back on the government to provide housing - an option the government is clearly against, and quite unable to do at present. There is a very simple economic rule that levels all - supply and demand. If supply of houses exceeds demand, the prices will naturally fall, just the same as when the population increases, a shortage of housing will push the price up. None of your policies will stop the fundamentals! Watch the immigration figures - they are a much stronger influence on property prices than your silly little OCR!

Sometimes the simplest perspective is the best.

Bank liquidity requirements could keep rate hikes to a minimum

Friday, January 29th 2010, 3:40PM 1 Comment

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