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Kiwibank CEO Sam Knowles has queried the Reserve Bank’s decision to move ahead of the rest of the world to introduce prudential liquidity rules that are forcing the big 4 Australian owned banks to raise more funds from retail depositers here, pushing up the cost of funds for Kiwibank.

Until late last year Kiwibank was able to raise all its funds from local depositers, but intense competition from other banks for retail deposits and Kiwibank’s own strong lending growth rate forced it to raise NZ$309 million in longer term funds from the Australian bond markets last year.

“The new Reserve Bank rules are forcing us to go offshore,” Knowles told a news conference after releasing first half results showing an 8% fall in profits despite a 27.4% growth in assets. Kiwibank’s ratio of net interest income as a percentage of average total assets fell to 1.4% from 1.8% the previous year as it was forced to pay higher rates for local deposits and pay higher rates for foreign longer term debt.

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Reserve Bank governor Alan Bollard said over the weekend the domestic economy was still fragile and the RBNZ remained comfortable with its view that it would keep the Official Cash Rate on hold until the middle or latter part of 2010.

Speaking to Guyon Espiner on TVNZ’s Sunday Q&A, Bollard also said the housing market was “looking slightly spongy” at the moment, despite previous fears of house prices going back into a boom. Bollard also reiterated his support for reform on property taxation.

The interview followed figures last week showing New Zealand’s unemployment rate jumped to 7.3% in the December quarter from 6.5% in September. The RBNZ had been forecasting a 6.6% unemployment rate for December, although Bollard said he did not think this meant the economy was in a lot worse shape than predicted:
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New Zealand’s unemployment rate rose to a seasonally adjusted 7.3% in the December quarter from 6.5% in September, as more people entered the job market but could not find work, Statistics New Zealand said.

(Update 1 includes Stats NZ release, Update 2 includes labour force participation rate, Update 3 follows currency movement, Update 4 includes ASB economist reaction. Update 5 includes BNZ economist reaction.)

Economists said the result was worse than the Reserve Bank expected and meant the central bank would remain comfortable with its outlook of a steady Official Cash Rate (OCR) at 2.5% until mid-2010. Wholesale interest rates and the New Zealand fell slightly as financial markets nudged their expectations of the OCR down a bit.

Retail mortgage and deposit rates, however, are unlikely to fall as banks face higher funding costs and capital requirements in coming years. Bank net interest margins have fallen more than 20 basis points in the last year as they are forced to raise term deposit rates to encourage deposits from local savers and to pay higher rates for international wholesale funds.

Economist expectations had centred around the unemployment rate rising to 6.8% during the quarter. The New Zealand dollar initially fell from 70.8 USc to 70.1 USc on the news and had fallen to around 69.9 USc by 11:30am.

ASB economist Chris Tennent-Brown said the headline unemployment figure was higher than economist expectations because more people chose to enter the workforce than was expected at this stage of the economic recovery. Tennent-Brown said the figures would continue to make the Reserve Bank comfortable with its view that it can keep the Official Cash Rate on hold at 2.5% until the middle of 2010 (see full comments below).

BNZ economist Stephen Toplis said the figures showed some slack in the market that meant the Reserve Bank could be relaxed about its current monetary policy outlook. (See fuller comments)

Seasonally adjusted figures show an extra 16,000 people joined the labour force during the December quarter (up 0.7%), while the number of unemployed rose by 18,000 to 168,000 people. This was the highest number of unemployed people since the June 1993 quarter, Stats NZ said.

The 7.3% unemployment rate is the highest level since the June 1999 quarter and up from 4.7% in December 2008 and 3.5% in December 2007. The number of employed people fell by 2,000 to 2,152,000.

The labour force is made up of those in work (employed) and those not in work but searching for it (unemployed). The number of working age people out of the labour force altogether rose by 4,000 (0.3%) to 1,086,000. The labour force participation rate rose 0.1% to 68.1% of the total working age population in the December quarter from September.

Here is the release from Stats NZ:
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The Reserve Bank of New Zealand has left the Official Cash Rate on hold at 2.5% and again pledged to leave it on hold until the middle of 2010. The global economy and the New Zealand economy were recovering, but sustained growth overseas was dependent on continued fiscal and monetary support and vulnerable to weak financial sectors, the bank said.

(Update 4 includes links to special report video. Update 5 includes ANZ reaction.)

New Zealand inflation remained within the bank’s target range and the removal of monetary stimulus was not needed until the middle of 2010, Governor Bollard said. This was in line with the bank’s December announcement and economist expectations. The New Zealand dollar fell marginally to 70.3 USc in the first 10 minutes of trade after the announcement before rebounding to 70.6 USc by 9.40am.

See here for a special report on the Reserve Bank’s decision and how the RBNZ is receiving monetary policy help from a number of outside sources.

Watch on YouTube here.

My view:

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ANZ and National Bank have introduced a new eight month term deposit rate at 4.8%, matching a six month rate offered by ASB and BNZ. The new rate is for deposits over NZ$10,000.

At the same time ANZ and National cut their six month deposit rates by 40 basis points (bps) to 4.0%, and raised their nine month rates 50 bps to 4.0%. The new rates are for deposits over NZ$10,000.

See and compare all deposit rates for terms less than one year here, and terms one year and greater here.

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Prices, as measured by the Consumers Price Index (CPI), fell 0.2% in the December quarter from September, figures released by Statistics New Zealand show. The drop was in line with the Reserve Bank of New Zealand’s forecast and is likely to reinforce the central bank’s view that it can keep the Official Cash Rate on hold at 2.5% until ‘around the middle’ of 2010.

(Update 1 includes Stats NZ comments. Update 2 includes further Stats NZ comments on trimmed mean measures showing underlying price change “quite flat” over December quarter. Update 3 adds economist comments. Update 4 tracks NZ$.)

Economist predictions had centred around a flat CPI during the December quarter, and ranged from of a 0.3% fall to a 0.3% rise. Stats NZ said its trimmed mean measures, which exclude extreme price increases and decreases, recorded quarterly movements ranging from no change to 0.1%. “This indicates that underlying price change for the quarter was quite flat,” Stats NZ said.

The CPI rose 1.3% in the September quarter, 0.6% in June and 0.3% in March. The New Zealand dollar initially fell by around 0.4 USc on the news to 73.5 US cents. Just after midday, the NZ dollar had fallen almost 0.75 USc to 73.25 USc.
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