Worldcom scandal haunts Kiwi markets

By Rob Hosking

Friday 28th June 2002

Further economic bad news is looming as the country moves into next month's general election.

The fallout from the Worldcom scandal in the US looks set to hit New Zealand investors both in equity and fixed-interest-rate markets.

New Zealand's sharemarket took an immediate hit this week. Meanwhile, the "flight to safety" resulted in investors flocking to fixed-interest and other safer investments, pushing short-term interest rates down.

How long this will affect investors remains to be seen. ANZ Bank chief economist David Drage said the short- term rates would probably stabilise and not affect the Reserve Bank's widely anticipated lift in the official cash rate by 0.25% next week.

"Interest rates did fall right across yield curve but there's been some comeback, particularly at the short end."

ANZ still expects acting Reserve Bank governor Rod Carr to lift the rate on Wednesday.

That's not a universal view however.

"There has been a move to safe havens and that is what you would expect after something like Worldcom," Forsyth Barr Frater Williams' Brent Stephen said. "You would expect that to happen for a while yet."

That would, in turn, put market pressure on the central bank to hold off the widely expected rate rise.

That market pressure comes on top of the political pressure Finance Minister Michael Cullen put the central bank under this week.

Only two months ago Dr Cullen declined to answer a question on interest rates at a Wellington Regional Chamber of Commerce lunch, saying ministers of finance had a chip inserted which prevented them from commenting on the Reserve Bank's approach to monetary policy.

That chip malfunctioned this week. Dr Cullen said the government would re-negotiate the policy targets after the election - confirming something The National Business Review reported three weeks ago - but did not say in what way they would be amended.

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