19 May 2012

Euro zone volatility 'could lower NZ interest rates'

6:20 am on 19 May 2012

A bank economist says says the Europe debt crisis could see interest rates in New Zealand dropping further.

At least two banks, Kiwibank and ASB, have begun to cut their fixed home loan rates in response to the uncertainty on world financial markets.

ASB on Friday reduced its four-year fixed home loans to 6.1% and the five year rate to 6.5% - in both cases a cut of 0.4 percentage points.

This follows reductions to its one-, two- and three-year fixed home loan rates earlier in the week.

On Thursday, Kiwibank reduced its fixed rates and extended its 4.99% one-year fixed rate special.

BNZ chief economist Tony Alexander told Morning Report that commodity prices could drop if China's exports to Europe fall, leading to less inflation and prompting a further fall in interest rates.

But he says situation is extremely difficult to predict and it is also possible that things will settle down in Europe and rates will rise again.

Mr Alexander says the financial markets are terrified of the fallout from what's expected to be a very messy situation if Greece exits the euro zone.

Financial commentator Bernard Hickey says New Zealand banks are insulated from what is happening in Europe because the country was more protected from the global financial crisis

He says New Zealand has not had a housing slump, did not expose itself to toxic mortgages like Britain and America and its strongest trading partner, China, was booming.