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Dr Bollard DO NOT cut the Official Cash Rate

09 Oct 2008 13:25TraderF

Dr Bollard DO NOT cut the Official Cash Rate!!  A cut in the cash rate to 6.5% is going to do nothing to help New Zealand’s property market or New Zealanders in general.  New Zealand has been in recession for at least two quarters and “Mainstreet” is holding very well.  This can chiefly be attributed to the very high employment levels.  New Zealanders do not need an aggressive interest rate cut.

 

The reality of the Global Credit Crunch is that access to the Interbank market for cash is the most important factor.  This cash is raised based on the London Interbank Offer Rate for New Zealand dollars. [FOREX:NZDUSD]  When our banks go to that market they need to be armed with a standout interest rate that they are able to pay.  If New Zealand banks are forced to lower interest rates domestically it hampers their ability to outbid other countries for the cash they need.  The Reserve Bank has a greater need to secure our banking system than it does to encourage domestic demand for debt. 

 

International capital flows are based largely on the difference between each countries’ domestic interest rate.  If “Interest Differentials between countries” narrow the cash will flow to the strongest country and New Zealand cannot possibly standout against the United States.  Our only hope is to offer a higher interest rate to offset the risk of lending to a small country.

 

It is in New Zealands best interest to have strong banks that have constant access to the funds they need to rollover their offshore facilities.  The last thing banks need is to see their net margin reduced which in turn reduces their ability to raise cash internationally; cutting the OCR is a really bad idea.

 

Look through the eyes of an international bank.  Why would they invest in New Zealand ahead of say the US?  The only compelling reason for the lender is to gain a higher return and we must be in a position to offer them a risk premium to ensure our banks have access to the funds that we need. Dr Bollard, don’t cut the OCR.

 

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