The Reserve Bank left monetary policy unchanged, as anticipated. The LSAP cap remains at $100bn, and the OCR remains at 0.25%.
However, the RBNZ strongly hinted that it will loosen monetary policy further by introducing a Funding for Lending Programme (FLP – basically low-interest loans to banks) by the end of this year.
The RBNZ remains extremely pessimistic on the economy. There was very little acknowledgement of recent stronger data. In particular, the Committee was divided on the housing market upturn, with some members arguing that it would soon fizzle out due to rising unemployment.
Consistent with its pessimistic stance on the economy, the RBNZ concluded that “further monetary stimulus may be needed” – as strong a hint as the Monetary Policy Committee could possibly give. The Committee directed the Bank to prepare to have an FLP ready to deploy before the end of the calendar year. Design details of the programme would be agreed and published ahead of deployment.
What all of this suggests to us is that the Committee currently expects that it will introduce an FLP this year, perhaps as soon as the November Monetary Policy Statement.
More details to follow in our bulletin later today.
RBNZ statement:
Prolonged Monetary Support Necessary
Release date 23 September 2020
Tēnā koutou katoa, welcome all.
The Monetary Policy Committee agreed to continue with the Large Scale Asset Purchase (LSAP) Programme up to $100 billion. This action is necessary to further lower household and business borrowing rates in order to achieve the Committee’s inflation and employment remit. The Official Cash Rate (OCR) is being held at 0.25 percent in accordance with the guidance issued on 16 March.
Reflecting the possible need for further monetary stimulus, the Committee noted the progress being made on the Bank’s ability to deploy additional monetary instruments. The instruments include a Funding for Lending Programme (FLP), a negative OCR, and purchases of foreign assets. The Committee agreed that these instruments can be mutually supportive in bolstering economic activity. Members also agreed that the alternative instruments can be deployed independently, and noted that the FLP would be ready before the end of this calendar year.
Economic information available since the August Monetary Policy Statement, both international and domestic, has confirmed the level of economic activity remains significantly below that experienced prior to the COVID-19 economic disruption. The ongoing virus-led activity restrictions – most notably in Auckland – had also continued to dampen economic activity, and business and consumer confidence.
Any significant change in the global and domestic economic outlook remain dependent on the containment of the virus, which is highly uncertain. International border restrictions will continue to significantly curtail migration and tourism, and lead to the activity outlook being uneven across industries and regions. Commodity prices for New Zealand’s exports remain robust, but this has been partly offset by the New Zealand dollar exchange rate moderating the return to local export producers.
Ongoing support for domestic economic activity is being provided through significant government spending on business assistance and household income support. This will be accompanied by a rising level of government investment. However, the removal of temporary support policies has commenced. For example, the Wage Subsidy scheme is now closed to new entrants.
In line with the weak underlying international and domestic economic conditions, the Committee expects a rise in unemployment and an increase in firm closures, as resource reallocation continues. Members agreed that monetary policy will need to provide significant economic support for a long time to come to meet the inflation and employment remit, and promote financial stability. They also agreed they are prepared to provide additional stimulus.
