Reserve Bank expects to print $28 billion for 'Funding for Lending'

Wednesday, 11 November 2020

Many people have come to believe nothing less than $1 million saved by 65 is enough. For a lot of people, that sum is unattainable, but they needn’t despair.

The Reserve Bank will kick off a Funding for Lending scheme in December, signalling there would be few conditions on how banks could on-lend the money.

Assistant governor Christian Hawkesby said the Reserve Bank expected to spend $28 billion on the scheme, if banks took up their full allocations.

The scheme, confirmed in its monetary policy statement on Wednesday, will see the central bank provide cheap funding to banks to on-lend to their customers in a bid to further lower retail interest rates.

The Reserve Bank confirmed the official cash rate would stay at 0.25 per cent, as it has committed, and that its $100 billion quantitative easing programme would continue.

The bank signalled earlier on Wednesday that it might take steps to prevent home buyers from getting in over their heads with debt by reintroducing loan-to-value (LVR) restrictions on mortgages from March – even as it put its foot down on monetary easing.

The Reserve Bank acknowledged economic activity had proved “more resilient than earlier assumed” at the time of its last monetary policy statement in August.

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“This trend was evident across a range of indicators, including employment, household spending, gross domestic product (GDP) and asset prices,” it said.

But it balanced that by saying the shock to the economy from Covid-19 was “very large and persistent” and that inflation and employment would remain “below the remit targets for a prolonged period”.

The outlook for global economic activity remained dependent on the containment of the virus, it said.

“While recent news on vaccine developments is positive, there remains a long and uncertain lag before any widespread vaccine deployment may be achieved.

“Meanwhile international border restrictions will continue to curtail international trade and migration, with variable impacts across industries and regions.”

There are concerns Funding for Lending could further fuel housing inflation; the Reserve Bank says it won’t try to target the scheme to fund certain types of bank loan, but banks will need to meet some targets to get all the money.

Cutting the OCR below zero and Reserve Bank-funded purchases of foreign assets also remained options, it said.

Banks were on track to be ready by the end of the year to complete the software changes needed to allow for a negative OCR, it said, though it has committed to keep the OCR unchanged until at least March.

The Reserve Bank had previously said it might kick off Funding for Lending before the end of the year.

It indicated it was sticking with its intention not to impose significant conditions on how banks could apply the funding.

Some central banks overseas such as the European Central Bank have attached conditions to similar schemes to dissuade banks from using funding to fuel mortgage lending.

But the Reserve Bank said on Wednesday that “targeting the incentives to specific sectors would reduce the programme’s effectiveness”.

Its monetary policy committee agreed “targeting credit to specific sectors was the role of the banking sector or government initiatives”, it said.

Hawkesby said the Reserve Bank would lend eligible banks an amount equivalent to up to 4 per cent of their eligible loan books, or up to 6 per cent if they met “particular lending targets”.

“By our measure that will add up to $28b if that full allocation is taken up.”

The two allocations suggest there may be some strings attached to a portion of the lending, despite the Reserve Bank’s more general comments on ‘conditionality’.

“From our perspective we are focussed less on the size of the programme,” Hawkesby said.

“We think the key thing is the impact that the programme will have on interest rates and how it will give banks confidence to lower their other funding rates – term deposits and wholesale funding rates.”

ASB chief economist Nick Tuffley said it appeared the scheme would be designed to be “large, incentivise lending, and be free of restrictions such as sector-specific targets that might otherwise constrain its effectiveness”.

“Those criteria should give it a good chance of being effective, though the devil will be in the final details,” he said.

The need for further cuts to the OCR would depend on the effectiveness of the Funding for Lending scheme in driving down interest rates “and on whether the recovery is not derailed by events”, he said.

“Nevertheless, we expect the Reserve Bank will keep the potential for a negative OCR firmly on the table and will be prepared to use it if needed.”

Westpac chief economist Dominick Stevens said the Reserve Bank’s preparedness to break a commitment it had made not to reintroduce LVRs before May raised questions over whether it might cut the OCR earlier than expected.

Reserve Bank governor Adrian Orr gave the bank’s word in March to keep the OCR at 0.25 per cent for a year and said on Wednesday that commitment still stood.

He acknowledged there might be a “trust” issue in the wake of the breach of the LVR promise.

It was “a really hard decision” because of that, but banks had contacted him calling for the reintroduction of LVRs, he said.

”In terms of disappointing people – it is not the bank CEOs.”

“House price inflation” had not been its concern, he said.

”It is the amount, level and proportion of high-risk loans that we are concerned about,” he said in attempting to draw a distinction between prices and default risk.

ANZ said it was now forecasting the Reserve Bank would follow its Australian counterpart and cut the OCR to 0.1 per cent in May, and perhaps drop it again to -0.25 per cent in August.