RBNZ Has Little Appetite for Lower OCR as Stimulus Calls Mount

(Bloomberg) -- New Zealand’s central bank is not currently preparing retail banks for the introduction of a negative official cash rate, suggesting policy makers will resist cutting it further for the time being.

The main reason the Reserve Bank committed to keeping its benchmark rate at 0.25% for at least a year “was to take away the imminent distraction of needing banks to prepare their systems for a negative OCR,” Chief Economist Yuong Ha said in written responses to questions from Bloomberg News. “That situation will change over time,” but the RBNZ was not working with banks on the issue at the moment, he said.

Just two weeks after unleashing the biggest monetary stimulus in New Zealand’s history, the RBNZ is already facing calls to do more. Economists and strategists say the bank will be forced to increase its quantitative easing program from NZ$30 billion ($18 billion) and may also have to take the cash rate negative -- an idea it initially warmed to but then rejected on the basis the banking system wasn’t ready for it.

Asked if the RBNZ considered 0.25% to be the lower bound for the OCR -- as it is for the Reserve Bank of Australia -- Ha reiterated that the bank had committed to keeping it there for at least 12 months.

“The OCR can technically be taken lower, but as outlined in the Unconventional Monetary Policy principles and tools document, we would assess the effectiveness, efficiency and an impact on financial system soundness of doing so,” he said. “That would also take into account the operational readiness of the banks’ systems to implement a lower OCR.”

Asked if the OCR could be lowered in increments of less than 25 basis points, he said adjustments have to strike a balance between making changes meaningful -- “will it translate into changes in rates faced by New Zealanders” -- and avoiding excessive fine tuning from smaller moves.

“We also have to avoid unnecessary volatility in interest rates and exchange rates in setting monetary policy,” Ha said. “International practice has largely settled on 25 basis point increments as a minimum.”

The RBNZ is under pressure to step up its bond purchases after the government announced a flood of issuance to fund its economic rescue packages. It has already increased the pace of its buying, from NZ$500 million in the first week to an intended NZ$1.8 billion this week.

“The Reserve Bank reserves the right to alter the composition and volume of purchases at each tender to meet the policy objectives” of the program, Ha said. These are “to keep interest rates on government bonds low and to support market functioning.”

Asked about increasing the size of the program and/or buying additional assets, such as local government debt, Ha said the RBNZ intends to purchase “New Zealand government bonds up a total of NZ$30 billion in the secondary market over the next 12 months.”

“Increasing the size or adding additional asset classes to the program is a decision for the Monetary Policy Committee, based on an economic assessment,” he said.

After Bloomberg received Ha’s written responses, the RBNZ said it would by a small amount of local government bonds, but that this was “distinct” from its QE program.

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