Bank liquidity requirements could keep rate hikes to a minimum

Reserve Bank of New Zealand Governor Alan Bollard says new liquidity rules for lenders, which come into effect in April, will restrict their access to cheap wholesale funding, helping damp credit growth and reducing the need to hike interest rates to cool the economy.  

"We believe that the new liquidity policy, and in particular the core funding ratio, could usefully contribute to the monetary policy task by limiting the banks' ability to fuel credit growth using cheap and plentiful short-term wholesale funding during boom times," Bollard told employers in a speech in Christchurch.

The ratio could automatically stabilise the economy in upturns, and "reduce the required hikes in the OCR" during these periods, he said.  

Under the changes, lenders must maintain a core funding ratio of 75% - that's the retail deposit base and longer-term wholesale funding as a percentage of assets. According to central bank reports, the nation's banks have had an "unusually high" proportion of their international debt securities maturing within one year compared with other developed countries.