RBNZ Increases Stimulus With Offer of Cheap Loans to Banks

New Zealand’s central bank will begin offering cheap loans to lenders within weeks to further reduce borrowing costs and stimulate the economy as it recovers from the coronavirus pandemic.

Policy makers agreed to begin a new Funding for Lending Program in December, which “will reduce banks’ funding costs and lower interest rates,” the Reserve Bank said in a statement Wednesday in Wellington. As expected, the RBNZ kept the official 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 anegative cash rate. Still, a surge in property prices and the economy’s robust recovery from a first-half recession is beginning to raise some doubts that the RBNZ will need to implement a sub-zero OCR.

The New Zealand dollar initially fell after the statement before trading slightly higher at 68.40 U.S. cents at 2:32 p.m. in Wellington.

119,944 in U.S.Most new cases today

+4% Change in MSCI World Index of global stocks since Wuhan lockdown, Jan. 23

-0.​7572 Change in U.S. treasury bond yield since Wuhan lockdown, Jan. 23

4.​7% Global GDP Tracker (annualized), Sept.


New Zealand’s successfulcontainment 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 6% of the total size of their loans to the household and non-financial business sectors.

The central bank said the program will be in place for at least 18 months and “should be a sufficient size to allow financial institutions to reduce interest rates with confidence.” It would “monitor pass-through to lending rates closely,” it said.

If the RBNZ decides to take the OCR negative next year, the FLP lending rate would fall with it so that banks can pass the cuts on to customers. Retail rates would remain positive because of the margin between them and the cost of funds.

In its record of meeting, the Monetary Policy Committee said the banking system is on track to be operationally ready for negative interest rates by year end.

“The Committee agreed that it was prepared to lower the OCR to provide additional stimulus if required,” it said. It also said that “purchases of foreign assets, and interest rate swaps remain under consideration.”

Earlier Wednesday, the RBNZ acted to take pressure off banks by delaying the start of increases in capital buffers by a further 12 months until July 2022. It said the decision will provide lenders with more headroom to support the economy. The RBNZ also plans to consult on re-introducing restrictions on low deposit mortgage lending from March 1.

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 RBNZ’s new 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.

Inflation, however, is forecast to slow less than previously projected, with a low point of 0.6% early next year.

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