Orr readying new RBNZ stimulus tool as step towards negative rates

Bloomberg

New Zealand central bank (RBNZ) governor Adrian Orr is set to unveil a new monetary stimulus tool aimed at driving borrowing costs to fresh historic lows to spur economic growth.
Orr is expected to lay out plans on November 11 to provide cheap loans to banks, giving them scope to further reduce lending rates. The Funding for Lending Program, which could begin within weeks, is seen as a key step towards Reserve Bank cutting the official cash rate into negative territory next year.
“It’s an important part of making a negative OCR effective,” said Sharon Zollner, chief economist at ANZ Bank New Zealand in Auckland. “They’ll focus on the funding for lending program this time, and if they think more is required they can forecast negative rates in February and then deliver them in April.”
New Zealand’s economy is bouncing back strongly from a first-half recession after the country’s successful containment of Covid-19 saw a quick resumption of activity, and the housing market is running hot. But policy makers have stressed the downside risks ahead as the closed border hobbles the tourism industry and resurgent infection rates abroad threaten global growth.
The RBNZ will release its Monetary Policy Statement in Wellington on Wednesday and Orr will hold a press conference one hour later. The central bank will hold the cash rate at 0.25% and maintain its bond-purchase program at NZ$100 billion ($68 billion), according to economists.
Central banks around the world are gearing up for further stimulus as the virus forces governments to impose new lockdowns, damping the global outlook. Even though neighbouring 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. The RBA already offers banks cheap loans via a facility similar to what the RBNZ is expected to launch.
The RBNZ has briefed economists and media on the possible shape of the Funding for Lending Program, or FLP, and said it could be introduced before the end of this year. The program will offer banks long-term loans at or near the OCR. This will reduce their cost of funding, allowing them to lower retail lending rates.
Some economists say the FLP could be targeted at business lending so that it boosts economic activity rather than house prices. But they still expect it to reduce mortgage lending rates, with estimates ranging from 18 to 30 basis points. Currently, one-year fixed housing loans are hovering around 2.5%.
If the RBNZ decides to take the OCR negative next year, the FLP lending rate would fall with it, allowing banks to pass the cuts on to customers. Retail rates will remain positive because of the margin between them and the cost of funds.
Most New Zealand economists expect the RBNZ to cut the OCR to minus 0.5% in 2021, but several say the bank will refrain from forecasting that in its cash-rate projections this week to avoid being tied down. It has already stopped forecasting the OCR beyond March next year, the point to which it has committed to holding rate steady.
RBNZ policy makers have said they would rather do too much than too little with stimulus, and indicated they remain focused on downside risks in the medium term.
Still, a recent run of strong economic data and a rampant housing market could temper the tone of Orr’s comments on Wednesday.
While the jobless rate jumped to 5.3% in the third quarter from 4% in the second, that’s well below the double-digit rates initially forecast. Inflation printed weaker than expected, but annual house-price gains accelerated to 8% in October, upending expectations that prices would decline during the recession.
“They’ll find that hard to ignore, but there is still obviously a need for ongoing monetary stimulus,” said Dominick Stephens, chief New Zealand economist at Westpac Banking Corp. in Auckland. “We do not expect the RBNZ to directly signal OCR cuts next week. But we do anticipate that the RBNZ will repeat its previous message that it prefers a package of OCR cuts and an FLP, and that a negative OCR remains a live option if required.”