The Reserve Bank of New Zealand has boosted its major support package by 90% to $NZ60 billion while both keeping the Official Cash Rate steady at 0.25%, and suggesting that it could be cut further.
In its latest post-meeting announcement and monetary policy statement the bank said the cap on its Large Scale Asset Purchase (LSAP) was being lifted from the previous $NZ33 billion to “reduce interest rates quickly and sharply”.
The bank said a big increase in the cap was preferable to making a smaller rise now only to find that more should have been done earlier to push down rates.
It is a clear sign the central bank doesn’t think rates have fallen enough in NZ since the COVID-19 pandemic became the central problem for the country and the economy.
The boost to the RBNZ’s key quantitative easing program also came ahead of the country moving to lower its lockdown level to Level 2 from Wednesday night.
“We expect to see retail interest rates decline further as lower wholesale borrowing costs are passed through to retail customers. It remains in the best long-term interests of the banking sector to promptly maximise the effectiveness of our LSAP program,” the post-meeting statement from the bank said.
The LSAP program includes NZ Government Bonds, Local Government Funding Agency Bonds, and, now, NZ Government Inflation-Indexed Bonds. It is the best way for a central bank making sure the banking system has enough money to lend at the lowest rates to business and individual customers.
The Reserve Bank in Australia has a $A100 billion plan of targeting the 3-year interest rate at 0.25% (the same as the cash rate), plus several other policies to maximise the availability of money to the financial system and wider economy.
The bank also left the Official Cash Rate at 0.25% after governor Adrian Orr gave the central bank’s word in March that it would not move the rate for 12 months.
However, the RBNZ’s monetary policy committee said it was prepared to use additional monetary policy tools if and when needed “including reducing the OCR further”
“The Monetary Policy Committee is prepared to use additional monetary policy tools if and when needed, including reducing the OCR further, adding other types of assets to the LSAP programme, and providing fixed-term loans to banks,” the statement said.
“The global economic disruption caused by the Covid-19 pandemic is expected to persist and lead to lower economic growth, employment, and inflation both in New Zealand and abroad,” the bank said in a statement on Wednesday.
“Even if New Zealand successfully contains the spread of disease locally, reduced world activity will mean lower demand for many of New Zealand’s exports,” it warned.
