RBNZ Says Bank Capital Rules Won’t Hurt Economic Recovery

(Bloomberg) --

New Zealand’s central bank doesn’t expect its new bank capital rules to present a headwind for the economy, which looks to be near the point of entering a recovery, Deputy Governor Geoff Bascand said.

“We don’t expect major economic impacts” from banks raising their capital buffers, Bascand said in an interview Friday in Wellington. Furthermore, latest developments are “supportive of the story that we’re near or around that turning point” in the economic cycle, he said.

“We haven’t managed to weigh up all of the different developments yet, but I suppose an indication that you’re somewhere near a turning point is that the news is more balanced or there are as many ups as there are downs,” Bascand said. “There are still some downside risks -- the international economy is still soft and we haven’t yet made any substantive progress on trade or other geopolitical issues, so it’s not one-way traffic. But it’s at least a mixed, balanced story, which is what we were anticipating.”

The Reserve Bank’s final decisions on bank capital, announced Thursday, were less onerous than expected and give lenders more time to build up their buffers. That allayed fears that the new rules could hurt economic growth by driving up borrowing costs or prompting banks to ration credit to riskier sectors such as the crucial dairy industry. It follows some positive economic signs recently, such as improving business confidence and a higher milk-price forecast from Fonterra Cooperative Group.

The government has also announced plans to invest in short and medium-term infrastructure projects, and will give details of the fiscal stimulus at its half-year budget update on Dec. 11. Bascand said while details of the package remain to be seen, it’s possible that it could boost the economy as soon as next year.

The New Zealand dollar rose to a fresh four-month high on the comments as traders pared bets that the RBNZ will cut rates next year. The kiwi rose to 65.64 U.S. cents from 65.45 cents beforehand. There is now just an 8.9% chance of a rate cut in February, down from 15% earlier Friday and 30% a week ago, swaps data show.

Fiscal Stimulus

The RBNZ had always expected fiscal policy to boost growth through to mid-2020, Bascand said. If the government’s new spending plans sustain that boost for longer, through the second half of 2020 and into 2021 and 2022, “then it will definitely be supportive of the growth recovery,” he said.

“I think there was some concern in the business community, they saw a bit of a hole in the infrastructure spend, so if this allows them to start planning; even not getting boots on the ground, you’re getting services, engineers etc. working on bringing these projects to fruition,” he said. “So there is some hope, but we’ll just have to wait and see the detail.”

The RBNZ surprised most observers last month when it refrained from cutting its cash rate below 1%, saying there were signs the economy would stop slowing and that inflation would pick up. Bascand said the bank didn’t know of the government’s fiscal plans at the time and will be able to fully assess them at its next monetary policy review in February.

“I think that reinforces that the February assessment will be important,” he said.

Just hours before the RBNZ released its decision on bank capital, Fonterra raised its forecast milk price for the season to what would be the fourth-highest in its history.

Bascand said New Zealand’s strong commodity prices are “a good support to the economy” and make it easier for dairy farmers to manage what is still “a significant tail of highly stressed debt.”

“What they need to do is take advantage of this period to pay down some of that debt,” he said. “Low interest rates, high prices, you couldn’t get a better time to make some headway in amortizing that, and we hope that happens.”

To contact the reporter on this story: Matthew Brockett in Wellington at mbrockett1@bloomberg.net

To contact the editors responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net, Michael Heath, Brett Miller

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