KEY POINTS:
Major world central banks launched co-ordinated cash rate cuts today in a bid to counter the global financial crisis but only part of the cuts will trickle through to lending rates because of high interbank rates, a New Zealand bank academic said.
The US Federal Reserve, the European
Central Bank, Bank of England and central banks in Sweden and Switzerland all joined the new interest rate offensive, cutting rates by half a percentage point. China joined in cutting 27 basis points off its key rate.
But while the move brought temporary respite, London's main share market index soon fell back again and US stocks endured another rollercoaster ride, while Tokyo saw its biggest one-day fall in two decades.
The central banks highlighted in a joint statement that they had co-operated in "unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets" during the crisis.
David Tripe, director of Massey University's Centre for Banking Studies, said the central banks had lowered the rate at which banks raise funds from the central bank but concern about the "credit worthiness" of banks meant the margin between the interbank rate and the central bank rate was growing.
"In a normal liquid market when deciding on the interbank rate one would look at the central bank rate and calculate the added risk of the normal bank, usually between 10-30 basis points.
"Now people are saying `we have some real concerns about the credit worthiness of the normal bank' and the interbank rate is rising correspondingly."
Tripe said people are becoming concerned that just because a bank was solvent at the time of its last financial statements did not mean it was now.
The margin of the interbank rate to the central bank rate reflected this, he said.
"The reduction on the cash rate is not having much affect on the actual interest rate."
When the Reserve Bank of Australia (RBA) cut its rate by 100 basis points earlier this week banks reduced their mortgage lending rates by 80 basis points, not the full amount of the cut.
This was part of the reason the cash rate cuts were so large, Mr Tripe told NZPA.
He said there were "mutterings" the Reserve Bank of New Zealand (RBNZ) may make its official cash rate (OCR) announcement earlier than October 23 as planned and said a significant fall in the 90-day bill rate yesterday was a market indication that the cut would be bigger than previously expected by the market or the RBNZ.
ANZ senior market economist Khoon Goh predicted the New Zealand rate would also be cut by 100 points - the biggest ever cut in New Zealand.
The OCR was cut by 50 points following the September 11, 2001 terrorist attacks and has been raised by that amount, but never by any more.
"Of the two (trans-Tasman) economies it is the New Zealand economy that has contracted so far this year. The RBA movement was pre-emptive of a similar contraction," Goh told NZPA.
The "rather aggressive easing" of the interest rate to 6.5 per cent would help to stabilise the economy, he said.
ASB and BNZ both predicted a 75-point drop to 6.75 per cent.
- NZPA