MNI: 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

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