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New Zealand’s Central Bank Signals Openness to Looser Policy

New Zealand’s Central Bank Signals Openness to Looser Policy

New Zealand central bank Governor Adrian Orr signaled his intent to continue to loosen monetary policy as required, saying he’s determined to head off unnecessarily low inflation or even deflation.

While persistently low interest rates could lead to undue risk-taking and pose financial stability risks, Orr said these were outweighed by the damage that stagnant or falling prices could cause as the economy struggles to recover from the Covid-19 pandemic. The Reserve Bank is also motivated to limit the the rise in unemployment as much as possible, he said in a speech Wednesday in Wellington.

“Consistently below target inflation has its own unique challenges that are best avoided,” Orr said. “We strongly believe that the best contribution we can make to our monetary and financial stability mandates is ensuring we head off unnecessarily low inflation or deflation, and high and persistent unemployment.”

The comments suggest the RBNZ is increasingly likely to cut its official cash rate into negative territory early next year and that it intends to keep borrowing costs low for a prolonged period to aid the economic recovery. The RBNZ’s “least regrets” approach to policy, similar to the U.S. Federal Reserve’s new strategy, could see it allowing inflation to run above target for some time after a period of weakness, Assistant Governor Christian Hawkesby told Bloomberg last week.

Negative rates “is the next step and definitely more likely than not,” said Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland, who predicts the OCR will go sub-zero in April next year. “The risk of inflation undershooting their target is far higher over the medium term than the risk of it overshooting, so it’s foot-flat-to-the-floor time.”

The New Zealand dollar fell on Orr’s comments before regaining ground after he said he wasn’t concerned about the exchange rate, which has gained more than 10 U.S. cents since March. The kiwi bought 67.81 cents at 3 p.m. in Wellington, up 0.3% today.

Investors have increased bets on the RBNZ taking the OCR negative as soon as February. The central bank has committed to keeping its benchmark at 0.25% until March, but has asked retail banks to be ready for negative rates by Dec. 1 this year.

‘Lower Still’

The RBNZ last month predicted inflation would slow to just 0.4 by March and that the unemployment rate will rise to 8.1% later this year. Under its dual mandate, it aims to keep inflation around the midpoint of a 1-3% target range and to support maximum sustainable employment.

The RBNZ has already increased its quantitative easing program to NZ$100 billion to reduce bond yields. Orr said today he wants to see them go lower.

“We have managed to get overall interest rates in the country low, and our challenge is to make sure they go lower again, lower still, and they remain low until we achieve our goals around inflation and employment,” he said.

He reiterated that the RBNZ is actively preparing a package of additional monetary policy tools to use if needed, including negative rates, direct lending to banks and further expanding the QE program.

Additional QE could include broadening the scope of domestic assets the RBNZ is purchasing as well as adding offshore or foreign currency assets, Orr said. “We have enormous headroom at the moment but need to make sure there is plenty of headroom still available there if needed,” he said.

He said the bank “will not overly rely on a single tool that could lead to suboptimal outcomes.”

While the policy tools the bank is considering are not new to central banking, the RBNZ knows they are technical and unfamiliar to most New Zealanders and that it has an ongoing communications challenge, Orr said.

“Our next near-term challenge is to outline our future monetary policy strategies and tools, and when we might use them,” Orr said. “We are well prepared for this challenge.”

©2020 Bloomberg L.P.