RBNZ accepts mortgage-backed assets as collateral

Thursday 9th October 2008

The Reserve Bank of New Zealand said it will temporarily accept residential mortgage-backed securities as collateral to improve liquidity in the banking system.

"We will, if required, be prepared to lend on the basis of fully-secured Residential Mortgage-Backed Securities, prior to those securities achieving formal ratings," Governor Alan Bollard said in a statement.

The move mirrors action by the Australia's central bank, which yesterday relaxed restrictions on the use of securities for repurchase agreements, including RMBS. Bollard also indicated that he's unlikely to cut interest rates prior to the official review date of Oct. 23, dousing speculation he may go sooner to build on the momentum of the coordinated cut by other central banks.

"The centre of the financial crisis is in the U.S. and Europe and, while there will be ramifications for our economy, the next review of monetary policy is scheduled on 23 October," he said.

Economists say Bollard may be more inclined to make deeper cuts to interest rates this year after a 100 basis point cut by the Reserve Bank of Australia and reductions by the Federal Reserve, European Central Bank and Bank of England.

Bank of New Zealand head of research Stephen Toplis said his central view is a 50 basis point cut on Oct. 23 and a same-sized reduction in December. Toplis says the official cash rate may be reduced to 5.5% or lower from 7.5% now.

Central banks in South Korea, Taiwan and Hong Kong cut interest rates today, following their counterparts in the U.S. and Europe yesterday. The Bank of Korea reduced the seven-day repurchase rate by 25 basis points to 5%, Taiwan's central bank lowered the discount rate on 10-day loans to banks by 25 basis points to 3.25% and Hong Kong lowered its base rate to 2%.

By Jonathan Underhill

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