New Zealand’s central bank said it may launch a new stimulus tool this year to further reduce borrowing costs, a precursor to taking interest rates negative in 2021.
The Monetary Policy Committee favours introducing a Funding for Lending Program for banks “before the end of 2020,” the Reserve Bank said on Wednesday in Wellington after holding the official cash rate at 0.25% and keeping its bond-purchase program at $66 billion, as expected. “Providing term funding at rates near the OCR via an FLP would lower the financial system’s funding costs, and therefore borrowing costs for firms and households,” it said.
The RBNZ is actively considering taking interest rates negative and has said it would do so in combination with term funding for banks. The statement suggests the funding program would be introduced as a first step, allowing policy makers to unleash more stimulus while holding the cash rate steady until March in accordance with previous guidance.
“The RBNZ wants to add more stimulus, and is not prepared to wait until its commitment to hold the OCR at 0.25% expires next March,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “The intention to implement FLP before year-end may mean it is ready to implement the scheme at the November 11 Monetary Policy statement release.”
New Zealand suffered its worst economic contraction since the Great Depression in the second quarter, with gross domestic product shrinking 12.2%. Lower rates may be needed as the recovery is hampered by a closed border, which is crippling the key tourism industry, and a coronavirus outbreak in largest city Auckland.
Economists project jobless rate will rise to more than 9% in coming quarters, while annual inflation will slow below the 1-3% range the RBNZ targets.
“The pandemic and associated travel restrictions could have a significant long-term negative impact on the economy, with lower potential growth as resources were gradually redeployed within and between industries,” the RBNZ said. It expects an increase in firm closures, posing downside risks to the employment and inflation outlooks.
On the other side of the ledger, house prices have increased 4.6% the past three months reflecting record-low borrowing costs and limited supply.
Finance Minister Grant Robertson last week told Bloomberg the economy is rebounding strongly and he anticipates the RBNZ will take that into account when it decides whether to implement negative rates next year. A general election will be held on Oct. 17.
The RBNZ said monetary policy “will need to provide significant economic support for a long time to come” and that it is “prepared to provide additional stimulus.” As well as a negative cash rate and FLP, it has purchases of foreign assets and interest rate swaps under consideration, it said.
In its record of meeting, the policy committee expressed a preference for an FLP combined with “a lower or negative OCR.” It said deploying the FLP early could provide additional stimulus to the economy sooner and give certainty to financial institutions planning their funding needs.
The FLP tool provides collateralised long-term loans to banks in order to support monetary policy transmission through the banking sector, according to the RBNZ. The loans could be provided with conditions that require banks to increase their credit supply.
The New Zealand dollar initially rose on today’s statement before retracing. It was little changed at 66.15 US cents at 4:06 p.m. in Wellington. Short-dated New Zealand bond yields have already turned negative as investors ramp up bets that the RBNZ will cut rates next year.
The RBNZ said a front-loading of its bond-purchase program since August had contributed to lower government bond yields, as had the fact that market participants “now believed that it was likely the OCR would be reduced below zero next year.”
The banking system is on on track to be operationally prepared for negative rates by year end, the RBNZ said. Economists expect the RBNZ to give more details about its stimulus plans on November 11, when it will publish fresh forecasts for the economy and the cash rate.