MNI INSIGHT: Bank Capital Rules Could Affect RBNZ Rate-Setting

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of New Zealand may have to contend with a

slowing economy at the same time as its new capital adequacy rules tighten

lending conditions, potentially prompting the central bank to consider a rate

cut earlier than might otherwise be the case, MNI understands.

     The central bank is in no hurry to adjust benchmark rates, now at 1.75%,

but by the time the new regulations are implemented they may face a different

economic outlook.

     The stricter capital requirements for banks, announced in December and set

to be enacted by Q4 this year, were intended as a financial stability measure

for the housing market,

     While officials do not expect any "big bang" impact, as banks will have up

to five years to meet the new standards, the RBNZ thinks they could add 20 to 40

basis points to commercial lending rates. Some analysts believe the impact will

be as much as 125 basis points.

     The new rules will boost the minimum Tier 1 capital ratio for the four

major banks to 16% of risk-weighted assets, and for smaller banks to 15%, from a

minimum 8.5% now.

     --HIGHER LENDING RATES

     The central bank is aware though, that even if its more modest assessment

of the impact of the capital rules is correct, any further slowing of growth

through 2019 will feed an argument in favour of an official rate cut.

     The RBNZ held official rates steady at 1.75% at its February meeting,

signalling it was unlikely to move "through 2019 and 2020" because of the

slowing global and domestic economies.

     RBNZ Governor Adrian Orr said then that, although some time off, the next

move in rates "could be up or down" -- a reinstatement of his more dovish tone

dropped from the November policy statement -- noting that the timing of any

changes to the official cash rate "remain data dependent."

     --GROWTH DATA KEY

     GDP growth for Q3 2018 was a disappointing 0.3%, delivering an annualised

2.6%. Q4 data will be released on Thursday, with the NZ Treasury expecting

growth of 0.6%, which would deliver annualised growth of 2.7%, below the 3.0%

posted in 2017 and a significant decline from the 3.9% posted in 2016.

     A low growth figure on Thursday would confirm the economy is flatlining and

suggest that the RBNZ estimate of 3.0% growth for 2019 is overly optimistic,

despite a decade-low unemployment rate of 3.9%.

     While the Bank believes its current stance is balanced and appropriate, it

is also aware that the economic data it will be presented with in 2019 and 2020

could change that approach.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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