Reserve Bank may need to pivot, but Wednesday may be too soon

Tuesday, 10 November 2020

Data from the Reserve Bank shows many households have been paying down their consumer debts.

ANALYSIS: The Reserve Bank’s monetary policy statement on Wednesday is shaping up to be a bit of cliffhanger.

The central bank will leave the Official Cash Rate unchanged at 0.25 per cent, but beyond that there are heaps of uncertainties.

Chief among them is whether governor Adrian Orr will do anything to further dampen down wavering expectations that the OCR will go negative next year, in the light of recent positive economic data.

And if he does, what implications could that have for the Reserve Bank’s Funding for Lending scheme, which would see it print perhaps $20 billion to $30b to lend to banks, to on-lend to their borrowers?

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

* Reserve Bank could speed up extra stimulus

Reserve Bank governor Adrian Orr is under growing pressure not to do more to inflate house prices.

The original rationale for Funding for Lending was that it would be needed to ensure banks could pass on the benefit of a negative OCR to customers.

Funding for Lending and a negative OCR were very much seen as going hand-in-hand.

But if the OCR stays in positive territory, then do banks really need the scheme, especially considering the volume of cash that has piled up in interest-free transaction accounts?

The Reserve Bank’s habit of only moving the OCR in minimum increments of 25 basis points is also looking tough to explain.

The Reserve Bank of Australia cut its OCR to 0.1 per cent last week.

Our Reserve Bank has hinted the practical floor for the OCR here probably sits at about -0.75 per cent.

So if more stimulus is needed why not follow Australia, or cut the OCR to 0.01 per cent to deliver a quarter of the maximum easing before reaching deeper into the toolbox of unconventional monetary policies?

If the Reserve Bank does take this opportunity to flesh out its plan for a Funding for Lending scheme, will it choose to place limits on the ability of the banks to use that funding for mortgage lending?

It has hinted such controls are unlikely.

But there is strong speculation that Finance Minister Grant Robertson has being pushing for a rethink, given runaway house prices.

Will we see the Reserve Bank move to reintroduce loan-to-value ratio controls on mortgage lending to put a handbrake on the housing market even while it puts its foot down on a monetary stimulus?

There are plenty of reasons to question whether further monetary easing is justified at all, right now.

They include unemployment coming in an at a lower-than-expected 5.3 per cent, consumer spending picking up, and share markets rising to record levels on hopes of an effective coronavirus vaccine.

But the Reserve Bank supertanker doesn’t always stop on a dime.

ANZ chief economist Sharon Zollner says there would be a point to pressing ahead with Funding for Lending as it should lower retail interest rates even at a positive OCR.

Indeed, she suggests it could be viewed as an alternative to a negative cash rate.

On balance, expect the Reserve Bank to stay broadly on script.

What will be interesting though is how confident it sounds, this time, reading it out.