Funding for Lending (FLP) a big boon for NZX Banks


  • RBNZ monetary policy had directed the central bank to be prepared for deployment of FLP before the end of 2020, to provide banks with low-cost funding to enable them to lower interest rates.
  • The central bank on 8 October indicated that it could deploy FLP that will inject billions of dollars into the financial system as soon as November.
  • RBNZ confirmed that the interest rate at which banks will borrow through FLP would be near the OCR rate but terms of funding, as well as the availability period of FLP, was yet to be decided.
  • The goal of the FLP scheme is to provide short term support for the economy amid the challenging times of coronavirus to help it recover and bring back normality.

Several businesses have witnessed a disastrous fall in revenues as countries implement social distancing restrictions to control the spread of coronavirus. Governments and central banks are responding with massive stimulus programmes to prevent bankruptcies arising from the country shutdowns.

Funding for Lending (FLP) was first launched by Bank of England and UK Treasury in July 2012, under which banks and building societies get funding at lower rates for extended periods. However, the UK government altered the rules in January 2014, and this type of funding was no longer used to back mortgage lending.


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NZ economy suffered from one of the most profound economic slumps in Q2 with GDP plunging by 12.2% in the June quarter compared to Q1. Strict nationwide lockdown forced businesses to close their shutters and people to stay at home and thus, pushing economic activity to a standstill.

RBNZ came up with FLP to safeguard NZ economy from coronavirus effects and to promote lower interest rates on loans for kiwis.


RBNZ declared plans to get banks to slash interest rates

In its monetary policy review on 23 September, RBNZ confirmed that OCR (Official Cash Rate) would remain at 0.25% and LSAP (Large Scale Asset Purchase) programme of up to NZ$100 billion will continue to maintain low-interest rates.

In the policy meeting, RBNZ indicated banks that it is planning to announce a programme to enable them to slash interest rates as there was a need for long-term monetary support to sail the economy through coronavirus.

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RBNZ’s Monetary Policy Committee also instructed the central bank to prepare to implement an FLP before the end of 2020.

As per Westpac Chief Economist, Dominick Stephens, banks obtain their funds from a blend of transactional deposits, term deposits and wholesale funds. Under the FLP scheme, RBNZ will provide funding to banks at low-interest rates close to OCR (currently at 0.25%) or close to current swap rates that are zero.

He stated that if banks can obtain money more cheaply, they can lend out the same more cheaply and yet maintain the same bank margin.


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Hence, RBNZ plans to bring mortgage rates down and subsequently, boost inflation as well as unemployment in line with its monetary policy.


RBNZ could deploy FLP as soon as November

In a briefing on negative rates and FLP programme, RBNZ declared that the lending programme would be ready to launch from November mid-week. However, its MPC would make the final decision on implementation.

The bank noted that any more monetary policy easing steps would help to lower borrowing rates and ensure that banks have ample cheap liquidity to fund investments made by businesses and expenditure by households.

Assistant Governor, Christian Hawkesby stated that RBNZ could give further information on its FLP Programme in its next policy meeting in November or in March. Banks are expected to get tens of billions of dollars under the scheme by RBNZ in loans, to further lend to their borrowers.

FLP will effectively offer banks a discounted retail rate which would reduce their funding costs and cut mortgage rates. Mr Hawkesby also stated that the bank had assumed that it would lend to banks at the same rate as OCR at 0.25%. Banks expect RBNZ to slash OCR to below zero in March or April.

He has suggested that the design of the scheme was yet to be finalised, but it would be simple with few conditions as complications can put banks off from using it.

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RBNZ Chief Economist, Yuong Ha stated that various measures taken by RBNZ (bond-buying programme, foreign exchange swaps and term lending facility) have been quite effective in reducing interest rates. For example, 2-year mortgages by more than three-quarters of a percentage point. The measures implied more cash available for spending and cheaper money for businesses and households to borrow.

Mr Ha asserted that further monetary expansion and cheaper rates could fire up the house and other asset prices. However, RBNZ remained focused on “least regrets” approach to monetary policy.

Mr Hawkesby said that RBNZ still has to decide on the period of FLP availability and terms of funding. He also added that a longer window for FLP implied more faltering as banks would not feel obligated to pull it down instantly.

Apart from FLP, negative rates have been in consideration by RBNZ. Mr Ha stressed that any decision on lowering OCR would be contingent on the economic outlook of NZ.


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