The only question is how far rates will fall, and that’s hard to even guess at until US wholesale interest rate and equities markets reopen. The Treasuries market is expected to reopen later today at 8 am New York time but the stock markets may not reopen until Monday.
New Zealand wholesale interest rates sold off dramatically yesterday and have only recovered slightly today.
The 90-day bank bills, the benchmark from which variable rate mortgages are priced, are trading at 5.62% compared with 5.83% late Tuesday. The wholesale market is also telling us fixed-rate mortgage will come down too. The April 2004 bonds have dropped from 6.06% on Tuesday to 5.73% and the 2006 bonds from 6.34% to 6.10%.
"We’re going to see a major knock to business and consumer confidence in the US," says John McDermott, chief economist at National Bank. The carnage may even be enough to tip the already sluggish US economy into recession, he says.
"That will spill over to our exporters and probably particularly hurt tourism." The Asian crisis showed us just how fast tourists can stop coming, he says.
Central banks’ immediate reaction globally yesterday was to ensure liquidity and that payments systems continued to function. McDermott says about $US80 billion was pumped into the global system from Japan and Europe yesterday. The Federal Reserve also added $US38.25 billion in temporary reserves to the US banking system.
Our own Reserve Bank assured the markets its standard liquidity provision facilities are available and operating as normal.
Central banks will some somewhat longer to assess the economic impact and are likely to wait for their next scheduled announcements before they actually cut rates so as to avoid panicking people further, McDermott says.
The Federal Reserve’s rate setting committee next meets on 2 October and is expected to cut the US benchmark from 3.5% to 3%. Our Reserve Bank’s next review of its official cash rate (OCR) is 3 October.
McDermott is predicting the Reserve Bank will need to cut the OCR by 50 basis points from its current 5.75% level by the end of the year. The Reserve Bank says it is monitoring developments.
Darren Gibbs, senior economist at Deustche Bank, says how far rates fall here will depend on just how badly US business and consumer confidence is dented.
"The impact can’t be positive for New Zealand. It’s a case of how negative it will be," Gibbs says.
Adrian Orr, chief economist at WestpacTrust, says even before Tuesday’s catastrophic attacks, he thought the global economy was sufficiently weak to force the Reserve Bank to cut rates.
"Human capital and confidence has taken a big hit."
But because the impact on the currently reasonably buoyant New Zealand economy will be indirect, the Reserve Bank can afford to wait and more fully assess the implications. Orr is picking the central bank to wait until November, but says he won’t be surprised if it cuts rates in October.
