The Reserve Bank of New Zealand left its key interest rate unchanged at 0.25% yesterday, but markedly increased its quantitative easing target to $NZ100 billion and hinted at the possible introduction of negative interest rates.
Yesterday’s boost was from the previous target of $NZ60 billion with the length of the program extended to June 2022.
The new outbreak of COVID-19 in Auckland added pressure to the NZ economy in the same way that the outbreak in Melbourne, and to a lesser extent in Sydney, have added to the pressures on the Reserve Bank of Australia and the Australian economy.
The move to expand the program reflected ongoing pandemic uncertainty, as highlighted by New Zealand’s fresh lockdown, RBNZ Governor Adrian Orr said in a statement announcing the decision of the central bank’s Monetary Policy Committee.
“Any significant change in the global and domestic economic outlook remains dependent on the containment of the virus, which is highly uncertain as evidenced today by the return to social restrictions in New Zealand,” he said in the statement.
“Such uncertainty is stifling household and business spending appetites, as highlighted in confidence surveys. Given the ongoing health uncertainty, there remains a downside risk to our baseline economic scenario.”
“International border restrictions will continue to significantly curtail migration and tourism, and lead to the activity outlook being uneven across industries and regions.”
“Commodity prices for New Zealand’s exports remain robust, but this has been partly offset by a rise in the New Zealand dollar exchange rate moderating the return to local export producers.”
The NZ dollar fell by around 20 to 25 points to just over 65 US cents after the RBNZ statement was released.
Looking at the future of rates, the Monetary Policy Committee decided to that any future move to a lower or negative OCR – if complemented by a Funding for Lending Programme – could provide an effective way to deliver monetary stimulus in addition to the expanded QE program if needed.
“Reflecting a possible need for further monetary stimulus, the Committee also agreed that a package of additional monetary instruments must remain in active preparation. The deployment of such tools will depend on the outlook for inflation and employment.
“The package of further instruments includes a negative OCR supported by funding retail banks directly at near-OCR (a Funding for Lending Programme). Purchases of foreign assets also remain an option,” the statement added.