RBNZ expands QE and says it is open to a negative OCR in future.
Today’s Monetary Policy Statement was almost exactly what we were expecting from the RBNZ.
The RBNZ has expanded its Long Term Asset Purchase programme (LSAP) from $33bn to $60bn. It also expressed that it was open to a negative OCR in the future, although that is not currently an option for operational reasons.
The expanded LSAP will include purchases of NZ Government Bonds, local government debt, and NZ Government inflation indexed bonds.
The RBNZ is aiming for a “least regrets” monetary policy response that delivers as much monetary stimulus as possible, as early as possible. However, between the lines we suspect that the RBNZ is uncomfortable with the outlook. The statement repeatedly noted that the risks are to the downside. The forecasts contain two alternative scenarios, both of which are to the downside of the central forecasts. And the RBNZ’s inflation forecast was below zero.
The RBNZ said that the most effective measure would be further fiscal stimulus. But it also talked about its own options for further stimulus if required, which included “further reductions in the OCR; a term lending facility; and adding other asset classes, such as foreign assets, to the LSAP programme.”
The RBNZ clearly left the door open to a negative OCR in the future. It reiterated that a negative OCR cannot currently be implemented due to operational issues at trading banks, and therefore “reaffirmed its forward guidance that the OCR will remain at 0.25 percent until early 2021.” The most significant point here is that the RBNZ gave forward guidance that the OCR would remain at 0.25%, not a commitment. Forward guidance is regularly updated in response to changing circumstances, so we feel comfortable maintaining our forecast that the OCR will drop to -0.5% in November (unless we hear something different in the press conference later this afternoon).
The curious aspect of today’s MPS was that the RBNZ published an “unconstrained OCR forecast.” This is the level of the OCR that would be necessary to achieve the RBNZ’s goals in a theoretical world in which the OCR could go as low as the RBNZ wanted. The unconstrained OCR forecast was -2%. This does not mean the OCR could actually go to -2%. But it does emphasise that the RBNZ would take the OCR below zero if operational realities allowed it to.
