New Zealand Moves to Soothe Market Tensions With Term Loans to Banks

(Bloomberg) -- New Zealand’s central bank will offer term loans to banks in an attempt to ease tensions in credit markets, a tool it last employed during the global financial crisis.

From today, the Reserve Bank will offer to lend funds to the banking system for terms of up to 12 months through the Term Auction Facility, or TAF, it said in a statement on its website Friday. It also announced other measures to support the functioning of the market, including increased provision of liquidity with foreign exchange swaps to ensure rates are near the official cash rate.

“The Reserve Bank continues to monitor developments, and remains ready to act further to ensure markets and the financial system operate in a stable and efficient manner,” Assistant Governor Christian Hawkesby said in a statement. “The Reserve Bank has a number of tools to provide additional liquidity and the ability to increase the size of operations where needed. We are committed to using these to support smooth market functioning.”

New Zealand bond yields and swap rates have surged this week as the coronavirus pandemic roils global markets, undermining transmission of the RBNZ’s monetary policy. On Monday, the central bank slashed its benchmark rate to 0.25% in an emergency move and said if more stimulus is required it will turn to large-scale asset purchases, or quantitative easing.

Bond yields fell across the curve after the RBNZ’s announcement, while swap rates were little changed.

Today’s moves will help to reduce rates, particularly short-term ones, but they may not settle jitters around long-term rates, said Dominick Stephens, chief New Zealand economist at Westpac Banking Corp. in Auckland.

“We suspect the RBNZ is going to have to begin a Quantitative Easing program very soon, similar to the Reserve Bank of Australia’s move yesterday,” he said. “This would involve buying large quantities of government bonds, which would reduce long-term government bond rates.”

The RBNZ conducted its first TAF auction this morning, offering NZ$2 billion ($1.1 billion) of three and six-month loans to banks. It received bids for only NZ$200 million.

Among the measures announced Friday was the removal of credit tiers on the cash balances banks hold at the RBNZ, known as ESAS accounts.

“That says to me they are going to flood the market with liquidity,” said Nick Smyth, rate strategist at Bank of New Zealand in Wellington. “They are obviously stepping up to the plate on the liquidity side, but I don’t think this is going to solve the issue at the longer end of the bond market, they’ve going to have to come back to that one.”

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