Reserve Bank could speed up extra stimulus

Wednesday, 23 September 2020

Reserve Bank governor Adrian Orr is pressing ahead with the groundwork for new tools to lower interest rates.

The Reserve Bank has signalled it could start lending money directly to banks to on-lend to borrowers before the end of the year to lower retail interest rates, in its latest review of monetary policy.

That would be ahead of any cut in the Official Cash Rate to below zero, which the bank has previously signalled would not happen before March next year.

The Reserve Bank signalled in August that it might need to help fund bank loans through a Funding for Lending programme to ensure banks were able to pass on the benefit of a negative OCR to borrowers.

Assistant governor Christian Hawkesby said then that it had not ruled out directly funding bank lending prior to cutting the OCR below zero, but he agreed in August he was not talking up that possibility.

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However, the Reserve Bank has now set a different expectation in a downbeat monetary policy review on Wednesday, saying it “preferred to launch an FLP before the end of 2020”.

ASB says the latest statement from Reserve Bank shows it wants to add extra stimulus “sooner rather than later”.

Its monetary policy committee had discussed the sequencing of additional monetary policy tools, it said, noting “staff advice that deploying an FLP before the forward guidance period for holding the OCR ends could provide additional stimulus to the economy sooner”.

“Having an FLP in place earlier would provide certainty to financial institutions planning their funding needs, and speed up the transmission of the programme by allowing banks to replace funding as it matures over time,” it said.

The bank said the scheme would “lower the financial system’s funding costs, and therefore borrowing costs for firms and households, and support the availability of credit to the economy.”

“The effectiveness of the programme would be influenced by the degree to which financial institutions passed on their funding cost declines to their customers,” it said.

Normally the Reserve Bank would today have reviewed the Official Cash Rate, which stands at 0.25 per cent.

But as it has promised to leave the rate unchanged until March, it renamed its six-weekly statement a “monetary policy review” rather than an OCR review to make clear that was not on the table.

ASB singled out the Reserve Bank’s comment on the timing of an FLP as significant, speculating the scheme could be announced on November 11, as part of its next monetary policy statement.

Brakes on the Auckland economy are a particular concern for the Reserve Bank.

The comments strongly suggested it would introduce the FLP programme ahead of any OCR cut, given the guidance to keep the OCR at 0.25 per cent until at least March 16 remained in place, it said.

The Reserve Bank wanted to add stimulus “sooner rather than later”, it said.

“The RBNZ is giving a clear signal that the FLP scheme will be coming soon, which will enable banks to start anticipating the implications of the FLP for bank funding,” ASB said.

Fisher Funds senior portfolio manager David McLeish said the Reserve Bank’s desire to avoid risking doing too little was “again on show”.

“The most important piece of information we received today was that the RBNZ continues to be strongly committed to getting retail interest rates in New Zealand lower.

“In their latest effort to reduce retail interest rates further, the Reserve Bank today suggested their Funding for Lending Programme could be launched by year end – earlier than previously expected.”

Westpac chief economist Dominick Stephens said the Reserve Bank remained “extremely pessimistic on the economy”.

“There was very little acknowledgement of recent stronger data.

“In particular, the committee was divided on the housing market upturn, with some members arguing that it would soon fizzle out due to rising unemployment,” he said.

The Reserve Bank said domestic and international economic data published since its last monetary policy statement in August had confirmed economic activity remained “significantly below” that experienced prior to the Covid-19 economic disruption.

“The ongoing virus-led activity restrictions – most notably in Auckland – had also continued to dampen economic activity, and business and consumer confidence,” it said.

“Any significant change in the global and domestic economic outlook remain dependent on the containment of the virus, which is highly uncertain.

“International border restrictions will continue to significantly curtail migration and tourism, and lead to the activity outlook being uneven across industries and regions.”