VZCZCXRO2877
RR RUEHAG RUEHCHI RUEHDF RUEHFK RUEHHM RUEHIK RUEHKSO RUEHLZ RUEHNAG
RUEHPB RUEHRN RUEHROV
DE RUEHWL #0357/01 2980214
ZNR UUUUU ZZH
R 240214Z OCT 08
FM AMEMBASSY WELLINGTON
TO RUEHC/SECSTATE WASHDC 5494
INFO RUEHNZ/AMCONSUL AUCKLAND 1768
RUEHBY/AMEMBASSY CANBERRA 5294
RUEHDN/AMCONSUL SYDNEY 0738
RHHMUNA/CDR USPACOM HONOLULU HI
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEHSS/OECD POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC 0259
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 03 WELLINGTON 000357 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/ANP, EAP/EP AND EEB, STATE PASS TO USTR, PACOM FOR 
J01E/J2/J233/J5/SJFHQ 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN APEC PGOV PREL NZ
SUBJECT: NEW ZEALAND'S RESERVE BANK SLASHES KEY INTEREST RATE 
 
Ref A) Wellington 337, B) Wellington 336 
 
WELLINGTON 00000357  001.2 OF 003 
 
 
¶1. (U) Summary:  New Zealand's Reserve Bank announced on October 23 
a cut in the benchmark interest rate by a record 1 percentage point 
to 6.5 percent in order to help stimulate the economy and ward off 
fears of a global economic downturn.  Some economists predict the 
rate could drop as low as 4.5 percent by March 2009.  The Reserve 
Bank believes that a fall in commodity and energy prices, along with 
rising fears of global recession, will dampen inflationary pressures 
and work to bring inflation within the legally mandated target range 
of 1 to 3 percent by the middle of 2009.  To further strengthen New 
Zealand's financial markets, the Reserve Bank has also announced 
that it will now guarantee a cap of NZ$1 million per depositor per 
guaranteed financial institution.  Meanwhile, ANZ National Bank, the 
country's largest bank, is one of the first to report a net profit 
despite the turmoil in the international financial markets.  End 
Summary. 
 
RBNZ Reduces Benchmark Rate to 6.5 Percent 
------------------------------------------ 
 
¶2. (U)  On October 23rd, New Zealand's Reserve Bank (RBNZ) announced 
a drop in its benchmark interest rate (the Official Cash Rate 
-"OCR") by a record 1 percentage point from 7.5 percent to 6.5 
percent to help ameliorate the effects of the current recession (see 
Ref A) and to limit the impact of the international financial crisis 
(see Ref B) on consumer confidence.  Reserve Bank Governor Alan 
Bollard said in announcing the rate reduction, "ongoing financial 
market turmoil and a deteriorating outlook for global growth have 
played a large role in shaping today's decision."  He further said, 
"economic activity in New Zealand will be constrained, relative to 
the outlook presented in the Bank's September Monetary Policy 
Statement, by international developments and New Zealand can 
therefore expect to face lower demand for exports and credit is 
likely to be less readily available in such an environment consumers 
and businesses are likely to be more cautious and curtail spending." 
 As for the possibility of future interest rate reductions, Bollard 
said, "the timing and extent of further OCR reductions will depend 
on evidence of actual reductions in domestic cost pressures as well 
as how the global financial developments play out." 
 
Predictions of Future Cuts in OCR 
--------------------------------- 
 
¶3. (U)  ASB chief economist Nick Tuffley expects a further 50 basis 
point cut in the OCR in December, followed by cuts of 25 basis 
points each in January and March 2009 bringing the OCR to 5.5 
percent.  UBS New Zealand senior economist Robin Clements expects 
the OCR to be cut to 5.75 percent by March 2009 while Stephen 
Halmarick, the Australasian co-head of economic and market analysis 
at Citigroup, said he now expected the OCR to be cut to 4.5 percent 
by next March.  The Reserve Bank has never previously cut the OCR by 
more than half a percent, or 50 basis points, since its introduction 
in March 1999. 
 
RBNZ's Mandate to Target Inflation 
---------------------------------- 
 
¶4. (U)  Governor Bollard is anticipating the reduction in domestic 
spending to be partly offset by the depreciation of the New Zealand 
dollar, the falling oil prices and the recent loosening of the GNZ's 
fiscal policy to help offset domestic inflationary pressures.  He 
said, "with weaker short-term growth and sharply lower oil prices we 
now expect that annual CPI inflation will return to the target band 
of 1 to 3 percent around the middle of 2009."  He remains concerned 
that domestically generated inflation (particularly in labor costs, 
electricity prices and construction costs) will remain stubbornly 
high. 
¶5. (U)  Inflation in New Zealand recently reached an 18-year high of 
5.1 percent, being pushed up primarily by petrol, housing and 
electricity costs per the October 21 Consumer Price Index (CPI) 
Report (Statistics New Zealand) which announced that for the prior 
three months ending September, the CPI was up 1.5% over last quarter 
with gas prices as a primary factor.  The current CPI increase 
follows a rise of 1.6% in the June quarter, which took the annual 
inflation rate at that time to 4%.  The CPI rise is well above the 
RBNZ's target of 1-3% over the medium term.  But a sharp decline in 
world financial markets, triggering falls in commodity and energy 
prices, along with rising fears of global recession, are expected to 
 
WELLINGTON 00000357  002.2 OF 003 
 
 
help dampen inflationary pressures. 
First Reaction to OCR Reduction 
------------------------------- 
 
¶6. (U)  Kiwibank and ASB were the first local retail banks to react 
to the reduction in the OCR by cutting home mortgage rates. 
Kiwibank dropped its variable home loan rate by one percentage 
point, bringing the new variable rate to 8.70 percent per annum with 
immediate effect for new customers and in two weeks for existing 
customers.  The one-year mortgage rate has also been cut to 7.99 
percent.  ASB Bank reduced its fixed lending rates, but is keeping 
its variable rate under review.  Among its new rates are a 6-month 
fixed rate of 7.99 percent, compared with its website-advertised 
rate of 9.25 percent, and a 12-month rate of 8.1 percent, compared 
with 8.95 percent on the website.  The rates are to take effect 
October 24. 
 
Measure Taken to Protect NZ's Financial Sector 
--------------------------------------------- - 
 
¶7. (U)  On October 22, the New Zealand Treasury released more 
details of the government's "Retail Deposit Guarantee Scheme," and 
said it expects to start announcing approvals for banks beginning 
October 28.  There was still no move to widen the scheme to cover 
wholesale as well as retail banking (see Ref B).  There is now a cap 
on the size of deposit covered by a guarantee of NZ$1 million per 
depositor per guaranteed institution.  NZ Treasury has also released 
details of fees for the new business done by registered banks and 
non-bank deposit takers not already subject to a fee charge. 
Critics had said that finance companies and other non-banks got a 
free ride under the scheme when it was first announced and the 
Reserve Bank moved quickly to announce a fee of 300 basis points per 
annum to be charged monthly to non-bank deposit takers that are 
rated below BB or are unrated. 
¶8. (U)  The Reserve Bank is also investigating options that will 
bring forward prudential requirements imposing discipline on 
non-bank deposit takers.  "The objective of the two-year opt-in 
scheme is to ensure ongoing retail depositor confidence in New 
Zealand's financial system given the international financial market 
turbulence," said Treasury Secretary John Whitehead and Reserve Bank 
governor Alan Bollard.  The issues relating to coverage of the 
scheme were mostly about the boundary between what constitutes 
retail and wholesale operations.  (Note:  Wholesale banking 
traditionally includes services by banks to large corporate clients, 
real estate developers, international trade/finance businesses, and 
institutional customers, e.g., pension funds, government 
entities/agencies, insurers, and stockbrokers, as contrasted with 
retail banking, which is the provision of banking services to 
individuals.  End note.).  The absence of deposit guarantees for 
wholesale operations may keep away or limit foreign  deposits coming 
into New Zealand banks (and, on which New Zealand banks heavily 
rely) and Australian banking regulations also limit the amount 
parent banks can lend overseas branches.  Therefore, New Zealand 
banks may be in a comparatively less advantageous position to 
attract foreign money without some wholesale bank guarantees. 
¶9. (U)  Finance Minister Cullen has publicly stated that the bank 
deposit guarantees should be finalized and functioning before the 
date of the election (November 8).  If the GNZ goes beyond 
guaranteeing retail bank deposits (estimated cost NZ$150 billion) to 
include more wholesale banking, the GNZ could be liable for coverage 
of up to NZ$300 billion worth of deposits.  Cullen is still 
reluctant to guarantee all wholesale deposits and said he refuses to 
be "stampeded" into urgent action. 
¶10. (U)  Not surprisingly, the guarantees for bank deposits has 
become an election issue.   National Party leader John Key and 
deputy Bill English have called for quick moves to extend the 
government's proposed deposit guarantees to cover banks' 
international borrowing (i.e., extend the guarantees to partial 
wholesale coverage).  Key said, "the difference between me and 
Michael Cullen is I understand the importance of ensuring that the 
wholesale scheme is in place under the right terms and conditions." 
Cullen accused National Party's leadership of putting big Australian 
banks ahead of the national interest saying, "they (National) need 
to recognize their responsibility is to the New Zealand taxpayer and 
the New Zealand financial system."  Cullen would prefer that 
Australian parent banks provide the additional guarantee coverage to 
their New Zealand branches (rather than the NZ government), which 
are limited under current Australian banking regulations. 
First Real-World Test of NZ's Financial Market 
 
WELLINGTON 00000357  003.2 OF 003 
 
 
--------------------------------------------- - 
 
¶11. (U)  ANZ National Bank, the country's largest bank, on October 
23 reported a NZ$990 million net profit after tax in the year to 
September 30, down from NZ$1.039 billion in the same period last 
year.  "A year ago none of us really expected the worst financial 
market conditions in anyone's working experience in the banking 
industry," said chief executive Graham Hodges.  The volatility in 
the markets meant more customers used institutional bank services 
like foreign exchange dealing, which helped the institutional bank 
make a $263m profit, up from $215m last year.  The bank is 
expressing comfort with its position in a world where banks are 
collapsing.  It is one of only 14 banks with an AA credit rating and 
has NZ$8b in liquid assets as of September 30. 
¶12. (SBU)  Comment:  The RBNZ is gambling that its historic 
reduction in the OCR to 6.5 percent will work to bring the economy 
out of recession while hoping that external dis-inflationary 
pressures will work to offset the effects of the rate reduction. 
The RBNZ will monitor closely the country's economic indicators over 
the next quarter to ensure that this scheme does not result in 
stagflation.  End Comment. 
MCKEAN