MNI INSIGHT: RBNZ To Favour QE Over Negative Rates In Downturn

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of New Zealand would favour launching

quantitative easing, via purchases of government and corporate bonds, rather

than cutting rates to zero or lower should the economy deteriorate

significantly, MNI understands.

     The RBNZ is expected to cut official rates by 25 basis points from the

current 1.5% at its meeting next week, a move which should both boost activity

and dull the effects on the local dollar of any Federal Reserve rate cut. But

the Bank has also modelled other policy responses to any continued weakness in

an economy vulnerable to global trade tensions and beset by poor business

confidence.

     These include cutting interest rates to zero or lower, but MNI's

understanding is that QE, incorporating purchases in New Zealand's

well-developed corporate bond market as well as of government debt, in

conjunction with lower rates is seen as potentially the most effective measure,

if circumstances call for unconventional action.

     Another potential move would be targeted low-interest loans to banks,

conditional on these funds flowing through to lending. But officials are

concerned that these might not have sufficiently direct an effect on activity,

and the Bank is also cautious about its relationship with the banking sector as

it prepares to increase capital requirements for the largest lenders.

     The RBNZ has received more than 100 submissions in its consultation over

plans to almost double Tier 1 capital requirements for the four biggest,

Australian-owned, banks from 8.5% to 16%, which critics say will increase the

cost of lending and have a dampening effect on the economy, and in particular on

the heavily indebted dairy sector. The big banks' parent companies are already

complaining about the cost of doing business in NZ and hinting at potential

exits as they campaign to water down the capital plan.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: MMNRB$,M$A$$$,M$N$$$,MT$$$$,MX$$$$]