Reserve Bank holds OCR at 0.25% but says not clear stimulus sufficient

Wednesday, 24 June 2020

OCR decisions can often be something of a foregone conclusion, but that was never truer than on Wednesday.

The Reserve Bank has confirmed the official cash rate will stay at 0.25 per cent, while talking up its other options for further monetary easing.

The bank said it had also agreed to continue with its quantitative easing programme, within its current cap of $60 billion, to 'keep interest rates low for the foreseeable future'.

But it left the door open to increasing that cap and deploying other additional measures to 'provide additional stimulus as necessary'.

Any change in the size of its QE programme would 'need to be of sufficient magnitude to make a meaningful difference', it said.

The central bank said its monetary policy committee agreed that it was 'not yet clear whether the monetary stimulus delivered to date is sufficient to meet its mandate'.

* Reserve Bank doubles down on promise to keep OCR at 0.25pc until March

* Reserve Bank ups 'quantitative easing' from $33b to $60b

ASB chief economist Nick Tuffley said the Reserve Bank's statement was 'pretty much in line' with its own expectations, but had a 'dovish tinge'.

It was important the Reserve Bank had continued to reiterate that it was prepared to provide stimulus if needed, and was working on getting its 'monetary tool kit' fleshed out, he said.

The reaction on financial markets was muted.

The New Zealand dollar slipped by a quarter of a US cent to US48.75c in the immediate wake of the announcement but was still fractionally up on its level 24 hours earlier.

There was no discernable impact on the share market, with the NZX50 briefly dipping and then recovering to be 0.9 per cent up on the day shortly before 3pm.

The Reserve Bank said New Zealand had contained the spread of Covid-19 locally 'for now', enabling a move down alert levels earlier than it had previously assumed and that the fiscal stimulus in the May Budget was also slightly larger than it had assumed.

'These outcomes give cause for some confidence but significant economic challenges remain.'

The bank also noted the recent appreciation of the New Zealand dollar, saying that would place 'further pressure on export earnings'.

'The economic risks remain to the downside despite some … data suggesting that demand has increased since the end of alert level 2 restrictions.'

Infometrics indicated the Reserve Bank might have crafted its statement with one eye on currency markets.

'The Reserve Bank has been at pains to balance near-term optimism with a realistic view of the economic outlook.

'Any perception of a rosier outlook would have risked a further appreciation in the exchange rate,' it said.

'We see scope for an expansion of the [quantitative easing] programme as early as August if the Reserve Bank isn’t convinced it has yet done enough.'

The extra options the bank could deploy in future to further ease monetary conditions – in addition to more QE – included 'a term lending facility, reductions in the OCR, and foreign asset purchases', the Reserve Bank said.

Governor Adrian Orr gave the bank's word on March 16 when he slashed the OCR rate from 1 per cent to 0.25 per cent that he would leave it at that rate for a year.

Deputy governor Geoff Bascand reiterated the commitment in April saying: 'We stick to our commitment. We are keeping the OCR on hold for a year.'

But that has not entirely extinguished speculation the central bank could cut the OCR before then if economic conditions deteriorate.

The Reserve Bank has asked banks to make any necessary changes to their software that might be needed to allow for a negative rate by the end of year.

Bascand has said in April that deadline was to ensure the Reserve Bank could verify they were prepared ahead of any possible rate change in March.