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Free AccessMNI: RBNZ Leaves OCR Unch At 0.25%, Boosts Asset Buys: Text
--Increases Asset Purchases From NZD33 Bln To NZD60 Billion
SYDNEY (MNI) - The RBNZ increased the volumes of its asset purchase program
and left key rates unchanged at its May meeting. The text of the statement
follows:
The Monetary Policy Committee has agreed to significantly expand the Large
Scale Asset Purchase (LSAP) programme potential to $60 billion, up from the
previous $33 billion limit. The LSAP programme includes NZ Government Bonds,
Local Government Funding Agency Bonds and, now, NZ Government Inflation-Indexed
Bonds.
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. 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.
The Monetary Policy Committee is committed to achieving its employment and
inflation objectives. The main support for the economy in this environment is
appropriately being provided through increased fiscal spending. However,
monetary policy will continue to provide significant support through keeping
interest rates low for the foreseeable future.
The balance of economic risks remains to the downside. The expansion to the
LSAP programme aims to continue to reduce the cost of borrowing quickly and
sharply. This is preferable to delivering a smaller amount of stimulus now, only
to risk later realising more should have been done.
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 programme.
The Official Cash Rate (OCR) is being held at 0.25 percent in accordance
with the guidance issued on 16 March. 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 Committee's decisions are guided by the
Reserve Bank's mandate and our decision making principles on the use of
alternative monetary policy instruments.
Meitaki, thanks.
Summary Record of Meeting - May 2020 Statement The Monetary Policy
Committee noted that the economic situation has deteriorated since the previous
policy meeting. The COVID-19 pandemic is affecting economic activity throughout
the world. The unprecedented health crisis has led many countries to introduce
measures to contain the spread of disease. In New Zealand, activity has fallen
sharply as a result of the pandemic and containment measures. The sharp
contraction in activity is expected to reduce inflation and employment below the
Bank's objectives for several years.
Members discussed the significant uncertainties surrounding the economic
outlook. The pandemic and restrictions on the movement of people are uncharted
territory for modern economic policy. Here, and overseas, there is uncertainty
about the impact of containment measures on economic activity. Monetary policy
is using tools which have not been deployed before in New Zealand, and their
degree of success is something that will become evident over time.
To help understand the uncertainties, the Committee discussed several
different scenarios for the economic outlook. Members agreed that the situation
is too uncertain to allow any one scenario to be treated as a central
projection. Three scenarios were discussed, including what could happen if
extended containment measures are required. Members noted that the baseline
scenario was the most optimistic of the three. All three scenarios involved a
significant and unprecedented decline in economic activity and employment.
The Committee noted that more stimulus is needed to support a medium-term
recovery in economic activity, employment, and inflation. Members noted that the
main thing needed to support the economy is fiscal stimulus, given that fiscal
policy is best placed to directly support households and businesses. The role of
monetary policy is to support the economy by ensuring that interest rates remain
low, which will complement the effects of fiscal measures.
Members discussed the fiscal assumptions in the economic scenarios. It was
noted that the government has publicly announced that $52 billion has been made
available for pandemic recovery packages. This figure is used as the core fiscal
spending assumption in each scenario.
Members agreed that a 'least regrets' monetary policy approach is needed,
delivering stimulus sooner rather than later, and thus minimising the risk that
the stimulus delivered turns out not to be enough.
The Committee discussed the world economic situation. Members noted the
global environment is volatile and uncertain. Some commodity prices are strong,
but many of New Zealand's trading partners are experiencing economic disruption
and declining activity. Despite pockets of relative strength, conditions in
trading partners will be a drag on domestic activity.
The Committee discussed the balance of risks around the baseline scenario
and agreed that the risks are to the downside. Activity could be lower than
expected as a result of containment measures having more severe economic effects
than assumed. Another risk is that the pandemic itself lasts longer or has more
severe effects on trading-partner economies than assumed. There is also
uncertainty about the impact of monetary policy actions on the economy.
Members noted some chance that activity could be higher than expected.
There is some possibility that trans-Tasman travel could restart earlier than
assumed, or that a return to alert level 1 could happen sooner than expected.
Either of these events would result in spending and employment recovering
faster. Another possibility is that supply-chain disruption leads to relative
price shifts for specific consumer products, keeping average inflation higher
than expected. Members agreed that these possibilities were not material enough
to shift the overall balance of risks around the baseline scenario.
The Committee noted evidence on the effects of the Large Scale Asset
Purchase (LSAP) programme so far. Members were pleased to note that both
wholesale and retail interest rates have fallen. The functioning of markets has
also improved - a secondary goal of the LSAP programme. Further declines in
retail interest rates would be needed to fully deliver the stimulus. The
Committee noted that long-term interest rates in the government bond market are
also sensitive to a number of factors outside the LSAP programme, including bond
issuance and foreign bond yields.
The Committee discussed the secondary objectives of monetary policy. Some
members expressed concern about financial stability due to the economic
disruption of the pandemic. The Committee noted that the banking system is sound
and markets are functioning satisfactorily. Members agreed that all policy areas
- monetary, financial stability, and fiscal - are mutually reinforcing in this
environment, all working to achieve complementary goals.
The Committee discussed the range of monetary policy options. Members noted
that there are policy tools available that have not yet been used. The Committee
agreed that it will stand ready to deploy further tools as needed, should the
need for stimulus continue to increase. Tools available include further
reductions in the OCR; a term lending facility; and adding other asset classes,
such as foreign assets, to the LSAP programme.
The Committee noted that a negative Official Cash Rate (OCR) will become an
option in future, although at present financial institutions are not yet
operationally ready. The current goal of monetary policy tools is to reduce
borrowing rates for New Zealanders, and further OCR reductions at this stage
would not be effective in achieving that. Consequently, the Committee reaffirmed
its forward guidance that the OCR will remain at 0.25 percent until early 2021.
It was noted that discussions with financial institutions about preparing for a
negative OCR are ongoing.
Members agreed that an expansion to the LSAP programme is the most
effective way to deliver further stimulus at this time. The Committee noted
advice that adding inflation-indexed government bonds (IIBs) to the LSAP would
improve both market function and policy effectiveness. The Committee agreed to
add IIBs to the LSAP.
The Committee discussed ways to measure how much stimulus is delivered by a
given volume of LSAP. It was noted that while more purchases will deliver more
stimulus, it is not easy to translate this directly to an OCR-equivalent
measure. The Committee noted that the size of the LSAP programme needed to be
sufficiently large to keep interest rates lower across the yield curve. Members
agreed that the LSAP programme can be scaled as needed in future. Members noted
that additional LSAP purchases are covered by an updated Crown indemnity, which
represented a ceiling, not a target, for the total volume of LSAP.
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
[TOPICS: MMNRB$,M$A$$$,M$N$$$,MT$$$$]
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.