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Summary
- RBNZ had stated last week that a new stimulus tool called FLP would begin in December, which would offer bank loans at current OCR, reducing their funding costs and permitting them to decrease lending rates.
- The central bank is less likely to make aggressive cuts to OCR, as per many economists.
- The NZ economy proved to be more resilient than expected while all of its monetary options have been retained.
RBNZ retained the OCR at 0.25% and quantitative easing program unchanged, in the latest monetary policy meeting. The Monetary Policy Committee (MPC) agreed on offering additional monetary stimulus to the economy to meet its CPI and employment remit.
RBNZ also stated that further stimulus could be provided through the FLP programme. Last week, Reserve Bank of New Zealand (RBNZ) revealed that it would roll-out FLP in December with up to NZ$28 billion of funding available to banks priced at 0.25% Official Cash Rate (OCR).
The new tool would provide bank loans at the present OCR, lowering their funding costs and subsequently, aiding them in reducing lending rates.
ALSO READ: Negative official rates and FLP a downer for bank profits
The central bank stated that FLP would be in place for a minimum of 18 months to examine the pass-through to lending rates carefully. It also added that a stronger than expected data had given RBNZ the scope to stick to its guidance of not reducing rates by March 2021.
RBNZ is holding off the decision to shift to negative rates due to other monetary policy measures. Negative rates have been resisted by big banks arguing that they have limited success and the banking technology is up to it.
Is negative OCR now avoidable?
Many economists feel that negative rates would not be required if RBNZ launches the FLP programme next month to reduce home and business loans and individual interest rates. Also, RBNZ is less likely to make aggressive OCR cuts.
ASB has revised its projection of negative rates and has forecasted no changes for the foreseeable future. The bank also stated that the decision also demonstrated its view that FLP would be successful along with the continuing resilience of the NZ economy.
Sharon Zollner ANZ Chief Economist anticipates a more gradual path for OCR as FLP is now set to be rolled out. She also stated the likelihood of OCR to not go negative, but the overall outlook is still coherent with a bit more stimulus in time.
Kiwibank economists have stated that the FLP roll-out that offers banks very cheap funding should result in lower floating mortgage rates. According to them, Reserve bank has effectively told banks that they must lower their deposit rates, mortgage rates and business lending rates if they do not favour negative rates.
Further, the economy has bounced back faster than other countries after containing the community spread of coronavirus.
ALSO READ: RBNZ aiming towards reintroduction of LVR mortgage restrictions
However, as more job losses are expected in the quarters ahead, weak inflation and the economy in recession, RBNZ would be required to provide monetary support. RBNZ also has plans to reintroduce loan to value restrictions in March 2021 after a surge in the housing market.
