RBNZ Holds Rates, Ready to Deliver More Stimulus If Needed

(Bloomberg) -- New Zealand’s central bank maintained the size of its quantitative easing program and kept interest rates at a record low but said it is open to further stimulus if required to counter the impact of the coronavirus pandemic.

“The Monetary Policy Committee is prepared to provide additional stimulus as necessary,” the Reserve Bank said Wednesday in Wellington after holding the official cash rate at 0.25% and keeping its Large Scale Asset Purchase program at NZ$60 billion ($39 billion). “As well as potentially expanding the LSAP program, the committee continues to prepare for the use of additional monetary policy tools as needed.”

New Zealand’s success in containing Covid-19 allowed it to emerge from a nationwide lockdown earlier than the central bank expected, adding to signs that the economic slump won’t be as deep as it projected in May. Still, there may be a need for more stimulus as the virus continues to spread globally and the closed border decimates the tourism industry, the nation’s largest earner of foreign exchange.

“The bank highlighted that the continued border closure is exacerbating the negative impact of the virus outbreak for the New Zealand economy,” said Ben Udy, an economist at Capital Economics in Singapore. “The border closure will mean that GDP does not return to pre-virus levels until late 2021. The upshot is that more stimulus is likely to be needed.”

The New Zealand dollar fell on the statement. It bought 64.78 U.S. cents at 3:19 p.m. in Wellington, down from 65 cents beforehand. The RBNZ said the recent appreciation of the kiwi has placed further pressure on export earnings and damped the outlook for inflation. The yield on the benchmark April 2029 bond was little changed at 0.81%.

The RBNZ said the cash rate remained on hold in accordance with the guidance it issued in March. It did not, however, reaffirm that guidance, which was to keep the OCR at 0.25% at least until March next year.

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In its record of meeting, the policy committee said that staff are working toward “ensuring a broader range of monetary policy tools would be deployable in coming months, including a term lending facility, reductions in the OCR, and foreign asset purchases, as well as reassessing the appropriate quantum of the current LSAP.”

The committee said the existing LSAP program is continuing to ease monetary conditions but it is “not yet clear whether the monetary stimulus delivered to date is sufficient to meet its mandate” for inflation and employment. Members discussed “the pros and cons of expanding the LSAP program now” but concluded any increase would need further assessment.

“We will outline the outlook for the LSAP program and our readiness to deploy alternative monetary policy tools in our August Statement,” the RBNZ said. “A change in the size of the program would also need to be of sufficient magnitude to make a meaningful difference.”

The committee signaled some increased confidence in the economic outlook, noting New Zealand’s success in battling Covid-19 and saying the government’s fiscal response has been larger than expected. “These outcomes give cause for some confidence but significant economic challenges remain,” it said.

“The severe global economic disruption caused by the COVID-19 pandemic is persisting, leading to lower economic activity, employment, and inflation abroad and in New Zealand,” the RBNZ said. “The negative economic impact on New Zealand is exacerbated by the required international border restrictions, as the vast majority of the world battles to contain the pandemic.”

The economy shrank 1.6% in the first quarter -- the most in 29 years -- and economists expect a contraction of as much as 20% in the three months through June 30, when most of the lockdown occurred. The jobless rate is projected to rise to as high as 10% by the end of the year, while annual inflation will slow below the 1-3% range the RBNZ targets and may briefly go negative, analysts say.

The RBNZ will issue new forecasts at its next Monetary Policy Statement on Aug. 12.

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