Tuesday 18 August, 2020
The RBNZ’s Monetary Policy Statement released last Wednesday was much more dovish than the market was expecting. The RBNZ stated “there is downside risk to our baseline economic scenario” citing in the statement the long-term concerns around tourism and migration.
As a result of this forecast, they firstly announced that their QE bond buy-back programme known as LSAP (Large Scale Asset Purchases) for government bonds would be increased to $100 billion from $60 billion and they would increase the percentage limit of outstanding government bonds they can buy to 60% from 50% by June 2022.
The RBNZ also talked up the prospect of taking the OCR to a negative interest rate next year coupled with commencing a Funding for Lending Programme for commercial banks. This facility would allow the RBNZ to lend to banks at the Official Cash Rate (OCR) rate (or thereabouts), which would provide cheap funds and allow banks to make cheaper loans (mortgages etc) to their customers.
All of this means interest rates are going to be lower for longer and risks to further OCR rate cuts remain. It is clear from the RBNZ’s statement that they are going to err on the side of caution, and they will not be afraid to use more tools to meet their dual inflation and employment mandate.
It is also interesting to note that the decision to up their QE programme was not influenced by the outbreak of COVID-19 in Auckland last week. The letter from the Minister of Finance approving the increase to 60% on behalf of the Crown was dated August 6th.