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Summary
- RBNZ held its official cash rate at 0.25% and kept its Large Scale Bond Purchase Program of $100 billion intact, in its meeting on 23 September.
- MPC favoured introducing a Funding for lending Program for banks before the end of 2020.
- Members noted that the FLP could be launched as a first step to release more stimulus while keeping the cash rate steady at 0.25% until March 2021, in line with the 16 March’s declared guidance.
- RBNZ is actively considering negative rates and stated that the banking system is on the right track to be prepared for negative rates by the end of 2020.
In the latest meeting of RBNZ on 23 September, RBNZ affirmed its previous guidance to hold the official cash rate (OCR) at 0.25% until March 2021 while noting that a Funding for Lending Programme (FLP) would be introduced before the year ends.
In March 2020, the Monetary Policy Committee (MPC) had committed on keeping the cash rate at 0.25% for at least a year. On 23 September, the bank reinforced its earlier guidance announced on 16 March of keeping OCR at 0.25%.
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However, MPC guided the central bank to be prepared to provide low-cost, secured long-term funding to banks by the end of 2020.
RBNZ had signalled its preference for fusing introduction of FLP with a negative OCR in its August meeting.
Funding for Lending linked to lower OCR
RBNZ stated its inclination to unite a negative OCR with the unveiling of new term lending facility known as Funding for Lending Programme (FLP) in its August meeting.
RBNZ clarified that the FLP Programme would lower bank funding costs in a direct and indirect ways by lowering bank’s demand for and the price of other sources of funding. This would further reduce the borrowing costs for households and businesses.
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The central bank also considered the fact that globally, the FLP programme boosted the credit supply by including incentives for banks, which used the programme to expand their lending and offer more stimulus to the economy.
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Further, the bank noted that a term lending programme could be quite helpful in backing the transmission of monetary stimulus if the OCR were lowered. The programme could also aid in guaranteeing that that bank lending rates stayed sensitive to policy rate decrease, even though retail deposit rates come near zero.
However, in the latest policy meeting in September, MPC stated that the Committee could accelerate the process of reducing interest rates even further by implementing the FLP programme first.
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Members admitted staff advice that introducing an FLP before the forward guidance phase of keeping the cash rate steady at 0.25% expires, might offer additional support to the economy.
The Committee also stated that having an FLP in place sooner would provide assurance to financial institutions setting up their financing requirements and also quicken the transmission of the programme by enabling banks to substitute funding as it matures over time.
Sustained monetary support needed by the economy
The MPC agreed to continue with its Large Scale Asset Purchase (LSAP) Programme of up to $100 billion, which was required to reduce household and business borrowing rates to attain inflation and employment target of the Committee.
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RBNZ has pledged to buy up to $100 billion of NZ Government bonds from the secondary market by June 2022.
Members also kept a note of the front-loading and growth of the LSAP Programme post its August statement added to reduce government bond yields.
The members unanimously reached on an agreement upon the inflation outlook and job appearing to be dejected. There is a significant uncertainty about the potential spread of COVID-19 both locally and globally, as well as on the consequent transition of economic, health and social practices.
The Committee concluded that a deep and sustained economic slowdown would make it challenging to meet its targets for inflation and employment while posing a significant threat to financial stability.
Subsequently, delivering appropriate monetary support will help the Committee to meet its goals and foster financial stability.
Source: RBNZ
The MPC reaffirmed that it was prepared to use additional tools like Funding for Lending Programme (FLP), a lower or negative OCR, purchases of foreign assets, and interest rate swaps for further stimulus when needed.
Economic outlook and case for negative rates
New Zealand experienced the worst economic recession in the Q2 of 2020 since the official records began in 1987, with a 12.2% drop in its GDP. Lower rates could be required as the recovery is slowed down by a closed border, which is undermining the key tourism sector, and COVID-19 outbreak in Auckland.
The RBNZ stated that the present restrictions on virus-led activity, especially during the second wave of infections in Auckland, have persisted in diminishing the economic activity and the confidence of companies as well as consumers.
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Bank analysts are forecasting that the unemployment rate will increase to above 9% in the upcoming quarters, while annual inflation will decelerate below the RBNZ target level of 1-3%.
NZ dollar fell to a multi-week low of USD 0.6564 on 23 September after RBNZ declared in its policy statement that it is prepared to lower the policy rate to provide additional stimulus if needed.
RBNZ is actively considering negative rates in combination with FLP and stated that the banking system is expected to be operationally ready for negative rates by the end of 2020.
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Westpac anticipates RBNZ to decrease the OCR to -0.5% in 2021. Amid growing expectations of interest rates to go negative, ASB is picking them to drop to -0.5%.
Many economists anticipate that RBNZ will disclose more about its stimulus strategies on 11 November when it is due to provide new forecasts for the economy and the cash rate.
(NOTE: Currency is reported in NZ Dollar unless stated otherwise)
