RBNZ Unleashes More Stimulus as Economy Slumps on Lockdown

(Bloomberg) -- New Zealand’s central bank almost doubled its quantitative easing program and said it is open to cutting interest rates further, including taking them negative, as it attempts to cushion the economic impact of the coronavirus pandemic.

The Reserve Bank increased its bond-purchase program to NZ$60 billion ($36 billion) from NZ$33 billion and said it is prepared to use additional monetary policy tools if needed, such as reducing the official cash rate from 0.25%. It could also add other types of assets to its Large Scale Asset Purchase program and provide fixed-term loans to banks, the RBNZ said Wednesday in Wellington.

“The Monetary Policy Committee remains prepared to do whatever it takes to ensure that we have significant monetary stimulus in the economy,” Governor Adrian Orr told a news conference. “The balance of economic risks remains to the downside.”

New Zealand’s economy is expected to experience a record slump this quarter after the government enforced one of the strictest lockdowns in the world to curb the spread of Covid-19. While the country will begin to exit the lockdown tomorrow, unemployment is projected to surge and the economy may take years to recover, necessitating unprecedented fiscal and monetary support.

“Risks are skewed towards QE being expanded in time, and we would not rule out OCR cuts into negative territory next year,” said Sharon Zollner, chief economist at ANZ Bank New Zealand in Auckland. “Negative rates are a risky proposition in the New Zealand context, but keeping open the threat of them will help dampen short interest rates in the meantime, maximizing monetary stimulus.”

The New Zealand dollar fell after the announcement. It bought 60.11 U.S. cents at 4:50 p.m. in Wellington, down from 60.98 cents beforehand.

The RBNZ reaffirmed its intention to keep the OCR unchanged until early next year. Its new projections today show the OCR remaining at 0.25% through the first quarter of 2021, with no further forecasts beyond that point.

Negative Rate

In its record of meeting, the Monetary Policy Committee said that a negative OCR “will become an option in future, although at present financial institutions are not yet operationally ready.” The RBNZ has written to banks requesting their systems be ready for a negative OCR by the end of the year.

Orr said he wants to see banks lower borrowing costs for consumers and businesses. The expansion to the LSAP program “aims to continue to reduce the cost of borrowing quickly and sharply,” he said.

The economy contracted 2.4% in the first quarter and will slump 21.8% in the second, according to the RBNZ’s new projections, sending it into recession for the first time since 2010. However, growth will surge 23.8% in third quarter as activity rebounds with the easing of restrictions. The economy will shrink 1.4% in the year through March 2021, the forecasts show.

The annual inflation rate is projected to dip below zero early next year, reflecting lower fuel prices and the recession, and will likely stay below the bottom of the RBNZ’s 1-3% target band until mid-2022.

The jobless rate will peak at 9% in the third quarter this year while house prices are projected to fall 9% over the remainder of 2020, the RBNZ said.

“Activity has fallen sharply as a result of the pandemic and containment measures,” RBNZ policy makers said. “The sharp contraction in activity is expected to reduce inflation and employment below the bank’s objectives for several years.”

Bond Issuance

The government will unveil additional crisis measures in its May 14 budget that are expected to require massive bond issuance. The central bank is committing to soak up much of that additional supply on the secondary market in order to keep a lid on bond yields.

The committee agreed that an expansion to the LSAP program was the most effective way to deliver further stimulus at this time. It added inflation-indexed government bonds to the securities it is prepared to buy and said it was ready to add other classes such as foreign assets if required. The bond program is capped at 50% of the nominal bond market, according to a letter of indemnity to the RBNZ from the government.

“The committee noted that the size of the LSAP program needed to be sufficiently large to keep interest rates lower across the yield curve,” the record says. “Members agreed that the LSAP program can be scaled as needed in future. ”

The RBNZ has so far bought more than NZ$10 billion of government bonds, helping drive the April 2029 yield as low as 0.48% Wednesday from 1.47% immediately before QE was announced on March 23. The yield fell 12 basis points today.

Orr said yields had fallen in the way the RBNZ wanted and the bond market continues to function effectively. Asked if he would consider buying bonds directly from the government, he said that step was “a long, long way away” and needn’t be the next step if further stimulus is required.

“There are a range of other tools and we’re going to keep an open mind about it,” he said. “We want full optionality.”

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