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ZNR UUUUU ZZH
R 300512Z JAN 09
FM AMEMBASSY WELLINGTON
TO RUEHC/SECSTATE WASHDC 5665
INFO RUEHNZ/AMCONSUL AUCKLAND 1838
RUEHBY/AMEMBASSY CANBERRA 5374
RUEHDN/AMCONSUL SYDNEY 0790
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RUCPDOC/USDOC WASHDC 0274
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 03 WELLINGTON 000027 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/ANP AND EEB, STATE PASS TO USTR, PACOM FOR 
J01E/J2/J233/J5/SJFHQ 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD PGOV PREL NZ
SUBJECT: NEW ZEALAND'S RESERVE BANK SLASHES INTEREST WHILE FONTERRA 
REGISTERS BILLION DOLLAR LOSS 
 
Ref: Wellington 18 
 
WELLINGTON 00000027  001.2 OF 003 
 
 
¶1. (U)  Summary:  In a week of poor economic news, the Reserve Bank 
has reduced the Official Cash Rate to record lows while New 
Zealand's largest company Fonterra registered sharp losses that will 
translate into a 1 percent GDP reduction this year.  Meanwhile, the 
opposition Labour Party held its caucus to address the worsening 
state of the economy but its message has failed to resonate.  The 
country's attention is still focused on the economic stimulus 
package which Prime Minister Key has promised to announce in early 
February.  End Summary. 
 
Reserve Bank Slashes Official Interest Rate 
------------------------------------------- 
 
¶2. (U)  On January 29, the Reserve Bank of New Zealand (RBNZ) 
announced a 1.5 percent reduction in the Official Cash Rate (OCR) 
from 5.0 percent to 3.5 percent.  This equaled the last OCR 
announcement in December 2008, and was greater than most economists 
expected.  This latest cut means that NZ interest rates are now 
reduced to less than half the 8.25 percent level in July 2008 and 
now mark a historical low since the OCR was introduced as the key 
official interest rate in 1999.  (Note: This is also the first time 
RBNZ put its rate below the Australian Central Bank whose current 
official interest rate is set at 4.25 percent.  End note.) 
 
¶3. (U)  Reserve Bank Governor Alan Bollard remarked that the sharp 
drop is justified because "the news coming from NZ's trading 
partners is very negative."  He went on to say that with the global 
economy now in recession and the outlook for international growth 
being marked down considerably since December, "we now expect the 
impact on New Zealand, driven by these developments to be greater 
than forcast, resulting in a more negative outlook for the terms of 
trade and exports, and tighter credit conditions." 
 
¶4. (U)  With inflation pressures abating in NZ, the RBNZ expressed 
confidence that annual inflation will be comfortably inside its 
target band of 1 to 3 percent over the medium term.  Lower interest 
rates are expected to have a positive impact on growth, alongside a 
lower exchange rate (currently US0.52c) and a fiscal stimulus 
package due to be announced by the government in early February. 
Bollard combined the cut with a warning directly to the private 
banking sector saying, "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." 
 
¶5. (U)  All eyes now turn to the private banking sector to see what 
relief it may give to homeowners.  Some banks have already been 
trimming rates in expectation of today's RBNZ move.  Kiwibank 
dropped its one-year fixed mortgage rate to 5.99 percent last 
Friday.  This compares with an average one-year rate of 9.9 percent 
less than a year ago, according to RBNZ figures. 
 
Labour Party Reaction 
--------------------- 
 
¶6. (U)  Following a two-day Labour Party caucus in Auckland this 
week, Labour leader Phil Goff accused Prime Minister Key and his 
National-led government with not treating the financial crisis as 
urgently as other countries (see Reftel), and has called for the 
government to put pressure on banks to be flexible so people can 
escape high mortgage rates.  Goff said those who had bought houses 
during the peak of the housing boom were often on high fixed rates 
as much as 9 percent.  Many face very high fees if they try to break 
their mortgages to access the much lower rates now on offer.  "I 
think in particular circumstances, where there is hardship, the 
banks have got to come to the party and the Government has got to 
make that clear to the banks," said Goff. 
 
Despite Lower Rates Housing Still Unaffordable 
--------------------------------------------- - 
 
¶7. (U)  The Labour caucus stress on mortgages follows a report 
published January 27 which lists New Zealand as the second most 
expensive of six selected "housing bubble" countries in which to buy 
a house, with median prices 5.7 times the average national income, 
ranked just behind Australia. 
 
WELLINGTON 00000027  002.2 OF 003 
 
 
 
¶8. (U)  Demographia International Housing Affordability Survey, 
which measures the cost of buying a home in six countries at 265 
locations, placed New Zealand second worst, up one from its least 
affordable placing last year.  Australia has the most unaffordable 
housing, at 6.3 times annual earnings, followed by New Zealand 
(5.7), Ireland (5.4), Britain (5.3), Canada (3.5) and the United 
States (3.2).  Countries are considered to be in a "bubble" market 
when the price of housing exceeds three times the average annual 
household income per Demographia. 
 
National Reacts to Labour's Challenge 
------------------------------------- 
 
¶9. (U)  Following the release of the report by Demographia and in 
reaction to the Labour Party's challenge, National's Housing 
Minister Phil Heatley said that the Government planned initiatives 
to make home ownership more affordable, including: 
 
-- Working with city councils to remove planning restrictions on 
Maori-owned land for housing developments. 
 
-- Ensuring councils planned for a "forward supply" of suitable land 
zoned for new housing. 
 
-- Boosting the Housing Innovation Fund which provides money for 
community housing providers to NZ$20 million. 
 
-- Introducing a "Gateway" housing project, this would provide 
first-time homebuyers a lease-to-own scheme for purchase of 
government land.  Potential homeowners would later have the first 
option to buy the land at its original capital value, plus 3 percent 
for every year they lived on it. 
 
Fonterra's Sagging Fortune Drags Economy Down 
--------------------------------------------- 
 
¶10. (U)  Fonterra (NZ's largest multi-national company) has also 
announced this week that its latest payout to dairy farmers will 
drop to NZ$5.10 per kilogram of milk solids.  This amounts to a 90 
cent drop from its previous forecast and is down from the NZ$7 that 
the dairy cooperative was predicting at the beginning of the 2008-09 
season.  Compared with the initial NZ$7 forecast it effectively 
means farmers will collectively receive about NZ$1 billion less than 
forecast in November (equivalent to 1 percent of GDP or a drop that 
would cancel out the value of all NZ's wine exports) and NZ$2.3 
billion less than forecast in the middle of last year.  Falling 
international dairy prices are attributed to reduced demand, partly 
because of the recession and partly because of the previously high 
diary prices. 
 
¶11. (U)  Fonterra chief executive Andrew Ferrier said the European 
Union's recent reintroduction of dairy export subsidies was also a 
factor in the payout forecast cut but it could not be quantified at 
this stage.  Fonterra expects the dairy industry to be in for a 
rough ride in the next 18 months.  The payout forecast was lower 
than most economists had predicted, with some believing next 
season's payout could be down even more. 
 
All Eyes Turn to National 
------------------------- 
 
¶12. (U)  According to media reports, Deputy Prime Minister and 
Finance Minister Bill English has signaled elements of the 
government's economic stimulus package to be rolled out on February 
¶4.  He stated that New Zealand planned NZ$9 billion economic 
stimulus package will be rolled out over the next three years and 
maintains that by world standards, it's the fifth most ambitious in 
the OECD.  English further stressed that the government's programs 
need to be tailored in a way that both protects and creates jobs 
while targeting small and medium-sized businesses.  "With more than 
nine out of every 10 workers employed by these smaller enterprises, 
it's critical that we do everything possible to help them through 
these challenging times," said English.  He stressed that part of 
the package entails spending about NZ$1.45 billion this year on 
several infrastructure projects, such as housing, schools and roads, 
which can start immediately and then speed up larger infrastructure 
projects that will create jobs and improve national productivity. 
 
WELLINGTON 00000027  003.2 OF 003 
 
 
 
¶13. (U)  Some of the more general aspects of the plan include: 
 
-- Putting more money in New Zealanders' pockets through further 
personal income tax cuts on April 1, 2009, April 1, 2010, and April 
1, 2011. 
 
-- Exerting better control over government spending, demanding value 
for money for taxpayers and delivering smarter, better public 
services for all New Zealanders. 
 
-- Committing to regulatory reforms, such as a review of the 
Resource Management Act that will remove red tape that is choking 
business and the economy. 
 
-- Opening of the Prime Minister's jobs summit on February 27 in 
Auckland to be chaired by New Zealand Stock Exchange (NZX) chief 
executive Mark Weldon. 
 
¶14. (U)  English did sound a note of caution regarding the 
government's stimulus plan and warned that with the predicted 
deterioration in the Government's finances, calls for more 
government spending must be carefully weighed against the 
consequences of taking on more debt on behalf of current and future 
taxpayers.  "There are limits to how much the Government can borrow 
and spend," said English indicating his reluctance to take on 
unserviceable debt to float the plan. 
 
¶15. (SBU)  Comment:  Despite Labour's attempt to attack the National 
Party for not articulating its economic policies, it has so far been 
ignored.  The RBNZ and Housing Ministry are working to ease mortgage 
pressures, and Finance Minister English has already previewed the 
elements of governments' stimulus package.  Even faced with the 
worsening downturn in exports as evinced by Fonterra's recent 
report, most Kiwis still seem prepared to be patient as the National 
Government rolls out its stimulus plan.  End Comment. 
 
KEEGAN