MNI REVIEW: RBNZ Holds Rates, Launches New Funding Scheme

The Reserve Bank of New Zealand Wednesday held interest rates at a record low, as expected, and launched an NZD28 billion program offering low-interest funding to commercial banks but stopped short of committing to a move to negative interest rates next year saying it would assess the case later.

The RBNZ has said that the Funding for Lending Program (FLP) for banks is a preliminary step to negative official interest rates. However, Governor Adrian Orr, speaking after the rate announcement, said it was still "too early" to commit to such a move.

He re-affirmed the central bank's earlier guidance that the current record low rate of 0.25% would be maintained until next year, when the case for negative rates would be re-assessed and the move taken "if necessary."

The RBNZ Monetary Policy Committee next meets in February 2021 and its Monetary Policy Statement is due in March. The bank has traditionally announced changes in policy settings to coincide with the MPS.

Besides holding rates, the RBNZ also maintained its Large-Scale Asset Program to buy government and semi-government debt at NZD100 billion.

HOUSE PRICES

Orr said the purpose of the FLP, which will begin early December, was to reduce bank lending costs and noted that there had "been a lag" so far in wholesale interest rates translating to lending rates.

There is no stipulation on how commercial banks use the funds, meaning they can lend for property and to business. The NZD28 billion is calculated at 4% of banks' eligible loans and another 2% if they meet thresholds.

However, with NZ house prices soaring to record levels and fears of a crash as fiscal support tapers off, the RBNZ said it could consider reinstating Loan to Value Ratios (LVRs) for higher risk home lending from March 21.

At the same time, the RBNZ said it will hold off applying stricter capital controls for commercial banks until July 2022, a year later than planned.