English says PM's 2009 comment that a credit rating downgrade would push rates up 1-2% was right at the time, but it's different now

The Prime Minister's comment in 2009 that a credit rating downgrade would raise the government's borrowing costs and mortgage costs by 1-2% was right at the time, but does not apply today, Finance Minister Bill English says.

The government has come under critisism after credit ratings agencies Fitch and Standard & Poor's both downgraded the government's long-term foreign currency credit rating from AA+ to AA on Friday. English said the downgrade was due to the ratings agencies 'shifting the goalposts' for how they viewed countries with high amounts of foreign-owed debt.

The government has been in control-mode over what the downgrades meant for its economic plan, blaming the international environment - turmoil abounds in European and US financial markets - as the reason for the moves. The opposition Labour Party claims the downgrades indicated economic mismanagement from National, something PM Key and English refute. See Labour finance spokesman David Cunliffe's argument in this double-shot interview with Bernard Hickey on Friday.

Key and English had repeatedly used the prospect of a credit rating downgrade to dismiss any economic policy put forward by Labour, with Key in 2009 saying a downgrade would add one to two percentage points to the government's borrowing costs.

While opposition parties trawl through previous statements from Key and English as ammunition for the final week of Parliament sitting before rising for the November 26 election, English said over the weekend that the increase in borrowing costs would not be as much as Key had indicated in 2009.

New Zealand interest rates edged up about 5-10 basis points on Friday, with economists suggesting the rise should not be much more than that. See more here in our earlier articles on the Standard and Poor's downgrade and the Fitch downgrade in NZ's sovereign credit rating to AA from AA+.

Also see: Opinion: Bernard Hickey says the government can't just brush off the Double-Downgrade of NZ's sovereign credit rating as an accidental or irrelevant mistake.

Speaking on TVNZ's Q&A programme on Sunday, English said at the time, Key's comment would have been right as international wholesale money markets were still "quite brittle" following the collapse of US investment bank Lehman Brothers in late 2008 and subsequent credit crunch.

"We’d be better off without a downgrade, no doubt about that," English said on Q&A.

"In terms of how it flows through into interest rates, you’ve got pressures around the world that are bringing interest rates down, so the New Zealand government is paying less than it has in many decades for its debt on the one hand. On the other hand, the conventional wisdom is that the downgrade will tend to push our interest rates up. Now, on any given day, we don’t know where it will come out," English said.

The day before the downgrades, Treasury's Debt Management Office auctioned off NZ$1 billion worth of government bonds at near-record low rates. See more here in Alex Tarrant's article, Government raises record-equalling NZ$1 bln of debt as demand returns; 'Investors looking to diversify away from volatile Europe'; Paying 4.45% for 12 yr bond.

English said he did not expect the downgrades would add 1-2% to borrowing costs. 

"I think back in 2009 it would have. We were really under the test then. Now I think because of the progress that we’ve made, because the market sees us as having a credible path back to surplus and sound economic policy, there may be some upward pressure on rates, but bear in mind the interest rates currently are at a 45-year low," he said.

"Bear in mind the context here. Interest rates around the world are still headed down, and currently we’re paying the lowest interest rates on government debt that we have for many decades," English said.

Treasury forecast in 2009 that a ratings downgrade would increase all borrowing costs by 1.5%. See more here in this Beehive release.