Banks primed to expect sub-zero interest loans from Reserve Bank with few strings attached

Thursday, 8 October 2020

Assuming the official cash rate goes negative, banks will be able to pay back the Reserve Bank less than they borrow through its Funding for Lending scheme.

The Reserve Bank has signalled it envisages effectively paying banks to borrow newly created money from it next year – assuming the official cash rate falls below zero, as all banks now forecast.

Assistant governor Christian Hawkesby said the Reserve Bank could provide more information on its much-flagged Funding for Lending scheme when it releases its next monetary policy statement in November or in March.

“But it does not necessarily mean we will be launching the day after that,” he said.

The scheme is expected to see the Reserve Bank offer banks tens of billions of dollars in loans, to on-lend to their borrowers, in a bid to force down retail interest rates and shield the economy from the impacts of Covid.

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Hawkesby said the Reserve Bank assumed it would lend money to banks at about the same interest rate as the official cash rate, which currently stands at 0.25 per cent.

“On that basis you could assume that if we had a negative rate we would also be providing funding at a negative [rate] through Funding for Lending,” he said.

Banks expect the Reserve Bank to cut the official cash rate below zero in March or April.

The European Central Bank has lent almost €1.5 trillion (NZ$2.7t) to European banks at sub-zero interest rates this year under a similar scheme.

It has to some extent steered banks away from using the funds to support residential mortgage lending, towards them providing cheaper loans to businesses.

But there are strong signs that the Reserve Bank won’t go far down that path.

Hawkesby said the Reserve Bank was still working through the design of its scheme.

But he indicated it had picked up the message that it should keep it simple, with few conditions on the bank lending that it helped fund.

“To be effective at lowering funding costs, you want a decent amount of it that does not have ‘conditionality’ attached to it,” he said.

A largely strings-free Funding for Lending scheme could fuel concerns that the Reserve Bank’s monetary policy is indirectly contributing to higher house prices and other asset-price inflation.

But chief economist Yuong Ha made no apologies for its stance.

“We acknowledge asset prices will rise and house prices are the key one.”

But KiwiSaver accounts were also a big part of many New Zealanders’ wealth and could also be uplifted, he suggested.

“That is one of the channels through which monetary policy works.

“Low interest rates, asset prices rise, wealth rises, confidence is supported and the logical conclusion is that people spend more – that is what supports the economy.”