RBNZ Increases Stimulus as Doubts Emerge Over Negative Rates

New Zealand’s central bank delivered a fresh round of monetary stimulus while also projecting a more upbeat view of the economic recovery, prompting investors to remove bets that interest rates will go negative next year.

Policy makers agreed to begin a new Funding for Lending Program in December aimed at reducing banks’ funding costs and lowering interest rates, the Reserve Bank said in a statement Wednesday in Wellington. In its economic projections, the RBNZ was less pessimistic about future economic growth and inflation, and sees a lower peak in the jobless rate.

New Zealand’s currency climbed and bond yields surged as traders priced out the chance of the official cash rate being taken negative in 2021. Economists at ASB Bank and Bank of New Zealand removed sub-zero rates from their forecasts as a booming property market and the economy’s robust recovery convince them they are no longer necessary.

“Our assessment of how the economy is tracking suggests the FLP scheme could be enough stimulus to ensure the economic recovery remains sufficiently on track,” said Nick Tuffley, chief economist at ASB in Auckland. “We are shifting to forecast that the OCR will now remain on hold at 0.25%, although the balance of risks will remain skewed towards the need for further support.”

The New Zealand dollar jumped more than half a U.S. cent to 69.03 cents at 4:20 p.m. in Wellington. Ten-year bond yields rose as much 13 basis points, and swap rates climbed to a three-month high.

As expected, the RBNZ kept the cash rate at a record-low 0.25% and left its Large Scale Asset Purchase program unchanged at NZ$100 billion ($68 billion), but reiterated it is prepared to use additional tools such as negative rates if required.

Should the outlook for inflation and employment justify even more stimulus next year, the new lending program would help to ensure the effectiveness of a negative cash rate.

‘More Resilient’

RBNZ Governor Adrian Orr said the economy “has proved more resilient” than expected to date, but he wants to retain all his monetary policy options.

“It’s too early to tell” whether the RBNZ will need to take the cash rate negative, Orr told reporters at a news conference. “We want to leave all options open and we’ll be revisiting that decision at our next monetary policy committee, which is in February.”

New Zealand’s successful containment of Covid-19 has buoyed confidence and spending despite the impact of the closed border on tourism and the threat to global growth from resurgent infection rates abroad. The unemployment rate rose to 5.3% in the third quarter, well below the double-digit rates forecast at the outset of the pandemic.

Confidence in a global economic recovery was also boosted this week by news that a vaccine developed by Pfizer Inc. and BioNTech SE protects most people from Covid-19 and could potentially start to be rolled out early next year.

At the same time, central banks around the world are gearing up for further stimulus if required as governments in Europe impose new lockdowns, damping the global outlook. Even though neighboring Australia has brought Covid-19 under control, its Reserve Bank last week cut the benchmark rate to 0.10% and launched an additional bond-buying program.

New Tool

The RBNZ’s new Funding for Lending Program, or FLP, will offer banks loans at the prevailing OCR, reducing their funding costs and allowing them to lower lending rates. The loans would have a three-year duration and be offered against high-quality collateral. Banks could borrow up to 4% of their total outstanding loans and a further 2% on condition that they increase their lending.

The central bank said the program, which would amount to NZ$28 billion if fully taken up, will be in place for at least 18 months and it will “monitor pass-through to lending rates closely.”

Asked about the expected impact of the FLP on mortgage rates, Orr said: “we think it’s larger than shifting the OCR from 0.25 to 0.1 a la the Reserve Bank of Australia. So we think it’s a significant impact and we hope it is as big as possible.”

RBNZ Further Delays Bank Capital Increase

The RBNZ’s new projections today show the cash rate remaining at 0.25% through the first quarter of 2021, consistent with its previous guidance. The forecast track doesn’t extend beyond that point.

The central bank’s forecasts show the economy entering a double-dip recession this quarter, with gross domestic product projected to fall 0.3% in the final three months of this year and a further 0.2% in the first quarter of 2021.

But it sees GDP contracting 0.9% in the year ending March 2021 -- less than the 1.5% projected in August -- and growing 2.9% in the year ending March 2022.

The jobless rate is seen rising to 6.2% in the first quarter next year, compared to a previous forecast of 8%. Inflation is forecast to slow less than previously projected, with a low point of 0.6% early next year.

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.