Emergency cut to reassure stability of NZ banking system

The Reserve Bank of New Zealand (RBNZ) has made an emergency 75 basis point cut to the official cash rate, taking the rate to an unprecedented level of 0.25%. The cut has been accompanied with reassurances of the stability of the New Zealand banking system and that the RBNZ stands poised to implement further unconventional monetary policy measures as and when required.

New Zealand is the first country to open its business week after a rapid intensification of coronavirus restrictions over the weekend which will lead many global economies towards a sharp recession. The RBNZ is likely to coordinate policy responses further with its peers over the coming days. Further monetary policy support can’t be ruled out.

You may ask what these measures will do for everyday New Zealanders.

First and foremost, the surprise announcement is designed to protect the integrity of the New Zealand banking system. Liquidity in the banking system is important to help cash flow in a disrupted economy. Banking system integrity is also necessary to protect depositors’ funds.

As a borrower, whether a mortgage holder or business borrower, there is likely to be some modest relief to the interest rate you pay. But bear in mind that our banks also have to borrow on international markets where credit will be in tight supply. As a result, banks are still likely to be more cautious about additional lending.

The banking space will see further rapid changes this week in response to developments internationally. We are now in full-blown financial, as well as public health and economic crisis mode. The actions taken now are crucial to softening the interim blow, so that societies and economies can recover once the public health crisis comes under control.

Capital injection into Air New Zealand can’t be ruled out

The government announced over the weekend that all passengers arriving to New Zealand on international flights will be required to self-isolate for 14 days. This move effectively closes the borders to tourism so long as the policy is in place.

The response by airlines to the government’s new coronavirus travel restrictions will be swift. Most, if not all, international airlines are likely to cease flying to New Zealand for the time being. Air New Zealand will be forced to cut the majority of its international capacity. In the interim the government may need to charter aircraft to get New Zealanders home that have been stranded because of flight cancellations by international airlines.

The potential for a government capital injection to shore up Air New Zealand’s balance sheet is real so that it doesn’t break banking covenants given what is likely to happen to the airline’s share price when its trading halt is lifted. The prospect of such intervention would have seemed unfathomable just a week ago.