RBNZ Holds Policy, May Launch New Stimulus Tool This Year

New Zealand’s central bank said it may launch a new stimulus tool this year to further reduce borrowing costs, a pre-cursor to taking interest rates negative in 2021.

The Monetary Policy Committee favors introducing a Funding for Lending Program for banks “before the end of 2020,” the Reserve Bank said Wednesday in Wellington after holding the official cash rate at 0.25% and keeping its bond-purchase program at NZ$100 billion ($66 billion), as expected. “Providing term funding at rates near the OCR via an FLP would lower the financial system’s funding costs, and therefore borrowing costs for firms and households,” it said.

The RBNZ is actively considering taking interest rates negative and has said it would do so in combination with term funding for banks. Today’s statement suggests the funding program would be introduced as a first step, allowing policy makers to unleash more stimulus while holding the cash rate steady until March in accordance with previous guidance.

“Members noted staff advice that deploying an FLP before the forward guidance period for holding the OCR ends could provide additional stimulus to the economy sooner,” the committee said in its record of meeting. “Having an FLP in place earlier would provide certainty to financial institutions planning their funding needs, and speed up the transmission of the program by allowing banks to replace funding as it matures over time.”

Lower rates may be needed as New Zealand’s recovery from its worsteconomic contraction since the Great Depression is hampered by a second coronavirus outbreak in largest city Auckland. The jobless rate is expected to rise as the nation’s closed border cripples the key tourism industry.

The RBNZ said monetary policy “will need to provide significant economic support for a long time to come” and that it is “prepared to provide additional stimulus.”

The New Zealand dollar initially rose on today’s statement before retracing. It was little changed at 66.15 U.S. cents at 2:46 p.m. in Wellington. Short-dated New Zealand bond yields have already turned negative as investors ramp up bets that the RBNZ will cut rates next year.

Read More: New Zealand Eyes Sweden as Roadmap for Negative Rates

Economists expect the RBNZ to give more details about its stimulus plans at the next Monetary Policy Statement on Nov. 11, when it will publish fresh forecasts for the economy and the cash rate.

The economy shrank 12.2% in the second quarter, which was less than the RBNZ projected in its August policy statement. Still, restrictions to counter the fresh outbreak in Auckland — home to a third of New Zealand’s 5 million people — have curbed consumer spending and seen manufacturing contract. Bank economists project the jobless rate will rise to more than 9% in coming quarters, while annual inflation will slow below the 1-3% range the RBNZ targets.

The RBNZ said it “expects a rise in unemployment and an increase in firm closures.” It said the outlook for inflation and employment remains subdued and risks are skewed to the downside.

On the other side of the ledger, house prices have increased 4.6% the past three months reflecting record-low borrowing costs and limited supply.

Finance Minister Grant Robertson last week told Bloomberg the economy is rebounding strongly and he anticipates that the RBNZ will take that into account when it decides whether to implement negative rates next year. A general election will be held on Oct. 17.

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