Reserve Bank to raise cash float to $2b

The Reserve Bank (RB) today announced that it was again increasing the amount of cash it aims to leave each day in the banking system, this time to a whopping $2 billion.

The decision followed a similar announcement on January 31 that the central bank would raise the settlement cash level from $20 million to $500 million, and came as $2.5b in government bonds were due to mature on February 15.

The RB said the dramatic increase had "no real significance" in terms of monetary policy. It was a precautionary measure to ensure private sector banks had the necessary liquidity to meet payment and settlement obligations.

There is one big bond maturity each year but this year's maturity is larger than normal as international investors took advantage of New Zealand's relatively high yields.

Local banks' balance sheets have also swelled, due in large part to the housing boom, creating liquidity pressure. The banks must have positive balances with the RB at the end of each day. They are allowed to use government securities as collateral but the supply of these has shrunk relative to the size of the economy due to the Government running budget surpluses.

The February bond maturity reduces the amount of collateral available for banks to use.

The latest move will take place on Monday, ahead of the February 15 bond maturity and the February tax take.

In recent weeks, there has been a squeeze for cash, which has had the unintended consequence of pushing up interest rates in the foreign exchange forwards market -- making it costlier for traders to go "short" on New Zealand dollars.

Traders who short the kiwi dollar have to borrow in the forwards market and because of the tightness of cash, interest rates in that market have climbed sharply and well above the official cash rate of 7.25 per cent. Bank bill rates have also gone up.

Ninety-day bank bills were at 7.54 per cent today.

The New Zealand dollar barely blinked on the announcement, staying around US67.90c.

- NZPA