Brian Fallow: Ominous clouds on global horizon

Reserve Bank Governor Dr Alan Bollard. Photo / Mark Mitchell

Opinion

The Reserve Bank's monetary policy statement paints a picture of relatively sunny skies over the New Zealand economy but increasingly ominous clouds on the global horizon.

That the net effect is to to keep the official cash rate at its all-time low of 2.5 per cent "for now" is a call few are likely to quarrel with.

Nevertheless the bank's forecast track for short-term interest rates pencils in a full percentage point of increases during the June and September quarters next year.

Its overall implied outlook for the OCR is still lower than it was in June, however.

That is partly because the dollar, which it expects to remain painfully overvalued, is doing is some of its work for it.

Even more troubling is the fact that the overseas funding markets on which banks in this part of the world depend have tightened up on ever-mounting concerns about sovereign debt exposure among European banks.

So far that has had a limited effect on New Zealand banks' cost of funds, in part because of next to no growth in demand for credit over the past couple of years.

"New Zealand and Australian banks are highly liquid," governor Alan Bollard said.

The medium-term funding markets are not particularly healthy at the moment, he said, but the banks had not needed to go to them.

"At some stage they will need to, but that is more a next year story."

The difference between a "mild" impact form international developments, which would see local interest rates rise next year, and a severe one comes down to whether the financial markets on which our banks rely for funding start to jam up as they did after the collapse of Lehmans in 2008.

At the moment looks more like the situation a year earlier when Australasian banks, with virtually no exposer to sub-prime loans, could still access the funds they needed.