KEY POINTS:
Sharemarket losses aside, the major impact in New Zealand of the credit crisis so far has been higher mortgage rates as our banks must pay a larger risk premium on money they borrow overseas.
Westpac research economist Dominick Stephens said the events of the past few days would
see these risk premiums widen further even as underlying wholesale rates wereeasing.
"The Lehman Brothers collapse has taken the credit crunch to a new level, it's really very big."
Stephens believed banks here had yet to pass on all of the increased cost of funds seen since risk premiums rose from less than 1/10 of 1 per cent in July last year to around 1 per cent in August this year.
The latest carnage in the US financial sector would have seen those premiums rise even further, he said.
However, the Reserve Bank's bigger-than-expected half a percentage point cut to the OCR (official cash rate) last week demonstrated its willingness to offset overseas pressures to ensure mortgage rates did not rise further.
"The more that credit markets become difficult and funding premiums rise, the more the RBNZ will cut the OCR. Either way, mortgage rates are going to come down."
ANZ head of markets John Body held a similar view.
"I think you can almost certainly factor in another 50 basis points by the Reserve Bank in October. That's just to neutralise the impact of the current instability on funding costs."
Meanwhile, although some of the big four Australian banks have revealed painful but not critical losses related to the credit crisis, their New Zealand subsidiaries appear to have avoided any direct exposure altogether.
"This is, I guess, the payback for having what was seen as a pretty vanilla banking system," said Stephens.
"New Zealand didn't get involved with a lot of what was seen at the time as a lot of smart financial innovation which is now seen as absurd risk-taking."
While central banks in Japan, Australia and India yesterday plied money markets with cash to prevent the upheaval on Wall St from clogging the pipes of the global financial system, a spokeswoman for the Reserve Bank said it was "business as usual" at the RBNZ with no additional liquidity required yet.
ANZ's Body said one of the major effects of the turmoil was the uncertainty that seemed likely to dog markets for some time to come.
"I think it's too early for anybody to really understand what the end game is. In a way we're very much in the eye of the hurricane at the moment, you're not going to know how much damage has been caused until the hurricane passes and you can look up and see what's left standing."
