RBNZ Edges Closer To Negative Rates

By Glenn Dyer | More Articles by Glenn Dyer

The Reserve Bank of NZ continues towards the announcement of a negative interest rate regime later this year.

The bank said in its post-meeting monetary policy statement on Wednesday that it had made progress on what it calls a Funding for Lending program with the country’s banks that will be a part of the negative rates regime.

The RBNZ, which left its key rate steady at 0.25% also indicated it was close to the start of lending money directly to banks to on-lend to borrowers before the end of the year to lower retail interest rates.

That would be ahead of any cut in the Official Cash Rate (OCR) to below zero, which the bank has previously signalled would not happen before March 2021.

It has instructed the country’s banks, including the four big Aussie operators in NZ, to prepare their finances for a negative rate regime.

Such a move has negative implications for the big four which dominate the NZ economy with a market share together of 80%.

New Zealand is there biggest single non-Australian market and source of revenue and earnings. That could be threatened if the rBNZ goes to a negative rate structure by March next year.

For investors that would be a negative as well.

The RBNZ signalled in August that it might need to help fund bank loans through a Funding for Lending programme to ensure banks were able to pass on the benefit of a negative OCR to borrowers.

That is different to the RBA’s Term lending Facility in Australia which aims to lend money to banks who lend to businesses. The outcome is the same, lower interest rates because the TLF lowers the bank’s funding costs (The RBA money is cheaper that wholesale funding markets).

But the RBA scheme is designed to work with positive official rates and to try and encourage baks to keep lending to encourage the growth of aggregate demand.

The RBNZ said its monetary policy committee “agreed to continue with the Large Scale Asset Purchase (LSAP) Programme up to $NZ100 billion. This action is necessary to further lower household and business borrowing rates in order to achieve the Committee’s inflation and employment remit.”

“Economic information available since the August Monetary Policy Statement, both international and domestic, has confirmed the level of economic activity remains significantly below that experienced prior to the COVID-19 economic disruption.

“The ongoing virus-led activity restrictions – most notably in Auckland – had also continued to dampen economic activity, and business and consumer confidence,” the statement said.

“Any significant change in the global and domestic economic outlook remain dependent on the containment of the virus, which is highly uncertain. 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 the New Zealand dollar exchange rate moderating the return to local export producers.

“Ongoing support for domestic economic activity is being provided through significant government spending on business assistance and household income support. This will be accompanied by a rising level of government investment. However, the removal of temporary support policies has commenced. For example, the Wage Subsidy scheme is now closed to new entrants.

“In line with the weak underlying international and domestic economic conditions, the Committee expects a rise in unemployment and an increase in firm closures, as resource reallocation continues.

“Members agreed that monetary policy will need to provide significant economic support for a long time to come to meet the inflation and employment remit, and promote financial stability. They also agreed they are prepared to provide additional stimulus,” the statement concluded.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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