NEW ZEALAND'S RESERVE BANK SLASHES INTEREST WHILE FONTERRA

UNCLAS SECTION 01 OF 03 WELLINGTON 000027 SENSITIVE SIPDIS STATE FOR EAP/ANP AND EEB, STATE PASS TO USTR, PACOM FOR J01E/J2/J233/J5/SJFHQ E.O. 12958: N/A TAGS: ECON EFIN ETRD PGOV PREL NZ SUBJECT: NEW ZEALAND'S RESERVE BANK SLASHES INTEREST WHILE FONTERRA REGISTERS BILLION DOLLAR LOSS Ref: Wellington 18 WELLINGTON 00000027 001.2 OF 003 ¶1. (U) Summary: In a week of poor economic news, the Reserve Bank has reduced the Official Cash Rate to record lows while New Zealand's largest company Fonterra registered sharp losses that will translate into a 1 percent GDP reduction this year. Meanwhile, the opposition Labour Party held its caucus to address the worsening state of the economy but its message has failed to resonate. The country's attention is still focused on the economic stimulus package which Prime Minister Key has promised to announce in early February. End Summary. Reserve Bank Slashes Official Interest Rate -------------- ¶2. (U) On January 29, the Reserve Bank of New Zealand (RBNZ) announced a 1.5 percent reduction in the Official Cash Rate (OCR) from 5.0 percent to 3.5 percent. This equaled the last OCR announcement in December 2008, and was greater than most economists expected. This latest cut means that NZ interest rates are now reduced to less than half the 8.25 percent level in July 2008 and now mark a historical low since the OCR was introduced as the key official interest rate in 1999. (Note: This is also the first time RBNZ put its rate below the Australian Central Bank whose current official interest rate is set at 4.25 percent. End note.) ¶3. (U) Reserve Bank Governor Alan Bollard remarked that the sharp drop is justified because "the news coming from NZ's trading partners is very negative." He went on to say that with the global economy now in recession and the outlook for international growth being marked down considerably since December, "we now expect the impact on New Zealand, driven by these developments to be greater than forcast, resulting in a more negative outlook for the terms of trade and exports, and tighter credit conditions." ¶4. (U) With inflation pressures abating in NZ, the RBNZ expressed confidence that annual inflation will be comfortably inside its target band of 1 to 3 percent over the medium term. Lower interest rates are expected to have a positive impact on growth, alongside a lower exchange rate (currently US0.52c) and a fiscal stimulus package due to be announced by the government in early February. Bollard combined the cut with a warning directly to the private banking sector saying, "to ensure the response we are seeking, we expect financial institutions to play their part in the economic adjustment process by passing on lower wholesale interest rates to their customers - this will help New Zealand respond flexibly." ¶5. (U) All eyes now turn to the private banking sector to see what relief it may give to homeowners. Some banks have already been trimming rates in expectation of today's RBNZ move. Kiwibank dropped its one-year fixed mortgage rate to 5.99 percent last Friday. This compares with an average one-year rate of 9.9 percent less than a year ago, according to RBNZ figures. Labour Party Reaction -------------- ¶6. (U) Following a two-day Labour Party caucus in Auckland this week, Labour leader Phil Goff accused Prime Minister Key and his National-led government with not treating the financial crisis as urgently as other countries (see Reftel),and has called for the government to put pressure on banks to be flexible so people can escape high mortgage rates. Goff said those who had bought houses during the peak of the housing boom were often on high fixed rates as much as 9 percent. Many face very high fees if they try to break their mortgages to access the much lower rates now on offer. "I think in particular circumstances, where there is hardship, the banks have got to come to the party and the Government has got to make that clear to the banks," said Goff. Despite Lower Rates Housing Still Unaffordable -------------- - ¶7. (U) The Labour caucus stress on mortgages follows a report published January 27 which lists New Zealand as the second most expensive of six selected "housing bubble" countries in which to buy a house, with median prices 5.7 times the average national income, ranked just behind Australia. WELLINGTON 00000027 002.2 OF 003 ¶8. (U) Demographia International Housing Affordability Survey, which measures the cost of buying a home in six countries at 265 locations, placed New Zealand second worst, up one from its least affordable placing last year. Australia has the most unaffordable housing, at 6.3 times annual earnings, followed by New Zealand (5.7),Ireland (5.4),Britain (5.3),Canada (3.5) and the United States (3.2). Countries are considered to be in a "bubble" market when the price of housing exceeds three times the average annual household income per Demographia. National Reacts to Labour's Challenge -------------- ¶9. (U) Following the release of the report by Demographia and in reaction to the Labour Party's challenge, National's Housing Minister Phil Heatley said that the Government planned initiatives to make home ownership more affordable, including: -- Working with city councils to remove planning restrictions on Maori-owned land for housing developments. -- Ensuring councils planned for a "forward supply" of suitable land zoned for new housing. -- Boosting the Housing Innovation Fund which provides money for community housing providers to NZ$20 million. -- Introducing a "Gateway" housing project, this would provide first-time homebuyers a lease-to-own scheme for purchase of government land. Potential homeowners would later have the first option to buy the land at its original capital value, plus 3 percent for every year they lived on it. Fonterra's Sagging Fortune Drags Economy Down -------------- ¶10. (U) Fonterra (NZ's largest multi-national company) has also announced this week that its latest payout to dairy farmers will drop to NZ$5.10 per kilogram of milk solids. This amounts to a 90 cent drop from its previous forecast and is down from the NZ$7 that the dairy cooperative was predicting at the beginning of the 2008-09 season. Compared with the initial NZ$7 forecast it effectively means farmers will collectively receive about NZ$1 billion less than forecast in November (equivalent to 1 percent of GDP or a drop that would cancel out the value of all NZ's wine exports) and NZ$2.3 billion less than forecast in the middle of last year. Falling international dairy prices are attributed to reduced demand, partly because of the recession and partly because of the previously high diary prices. ¶11. (U) Fonterra chief executive Andrew Ferrier said the European Union's recent reintroduction of dairy export subsidies was also a factor in the payout forecast cut but it could not be quantified at this stage. Fonterra expects the dairy industry to be in for a rough ride in the next 18 months. The payout forecast was lower than most economists had predicted, with some believing next season's payout could be down even more. All Eyes Turn to National -------------- ¶12. (U) According to media reports, Deputy Prime Minister and Finance Minister Bill English has signaled elements of the government's economic stimulus package to be rolled out on February ¶4. He stated that New Zealand planned NZ$9 billion economic stimulus package will be rolled out over the next three years and maintains that by world standards, it's the fifth most ambitious in the OECD. English further stressed that the government's programs need to be tailored in a way that both protects and creates jobs while targeting small and medium-sized businesses. "With more than nine out of every 10 workers employed by these smaller enterprises, it's critical that we do everything possible to help them through these challenging times," said English. He stressed that part of the package entails spending about NZ$1.45 billion this year on several infrastructure projects, such as housing, schools and roads, which can start immediately and then speed up larger infrastructure projects that will create jobs and improve national productivity. WELLINGTON 00000027 003.2 OF 003 ¶13. (U) Some of the more general aspects of the plan include: -- Putting more money in New Zealanders' pockets through further personal income tax cuts on April 1, 2009, April 1, 2010, and April 1, 2011. -- Exerting better control over government spending, demanding value for money for taxpayers and delivering smarter, better public services for all New Zealanders. -- Committing to regulatory reforms, such as a review of the Resource Management Act that will remove red tape that is choking business and the economy. -- Opening of the Prime Minister's jobs summit on February 27 in Auckland to be chaired by New Zealand Stock Exchange (NZX) chief executive Mark Weldon. ¶14. (U) English did sound a note of caution regarding the government's stimulus plan and warned that with the predicted deterioration in the Government's finances, calls for more government spending must be carefully weighed against the consequences of taking on more debt on behalf of current and future taxpayers. "There are limits to how much the Government can borrow and spend," said English indicating his reluctance to take on unserviceable debt to float the plan. ¶15. (SBU) Comment: Despite Labour's attempt to attack the National Party for not articulating its economic policies, it has so far been ignored. The RBNZ and Housing Ministry are working to ease mortgage pressures, and Finance Minister English has already previewed the elements of governments' stimulus package. Even faced with the worsening downturn in exports as evinced by Fonterra's recent report, most Kiwis still seem prepared to be patient as the National Government rolls out its stimulus plan. End Comment. KEEGAN