MNI REVIEW: RBNZ Boosts Bond Buys, Flags Negative Rates

--Benchmark OCR Left Unchanged at Record Low 0.25%

--Governor Rules Out Primary Market Govt Bond Buys -- For Now

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of New Zealand increased its Large Scale

Asset Purchase program to NZD60 billion Wednesday and said it is preparing

domestic banks for official interest rates to possibly move into negative

territory.

     As expected, the RBNZ also held interest rates steady at a record low 0.25%

but said that a move below the zero bound "will become an option in the future"

and discussions with financial institutions about preparing for a negative OCR

are ongoing.

     The LSAP program will be increased from the NZD33 billion committed so far

to a total NZD60 billion to be spent over the next 12 months. The Bank said it

will now include NZ inflation-linked bonds in the list of assets that can be

purchased, mainly to "improve both market function and policy effectiveness." 

     Speaking after the decision, Governor Adrian Orr said the Bank would only

purchase Government bonds directly on the primary market if the secondary market

was "dysfunctional", but he was satisfied with the way bond markets were

operating at the moment.

     He said the RBNZ would purchase up to 50% of outstanding NZ Government debt

and 30% of local government debt.

     "The LSAP program needed to be sufficiently large to keep interest rates

lower across the yield curve," the RBNZ  said, before going on to say that

program could be further expanded in the future.

     The RBNZ expanded the LSAP as it was "the most effective way to deliver

further stimulus at this time" through driving lending rates lower.

     Orr noted that the list of eligible assets could be expanded further in

future, possibly to include the purchase of foreign assets.

     --LOWER RATES POSSIBLE

     The OCR was last cut on March 16 with the intention of being held steady

for 12 months, although RBNZ Governor Adrian Orr has recently fuelled

speculation of further cuts by not ruling out the prospect of negative rates.

     Deputy Governor Geoff Bascand said the central bank was "monitoring the

progress" of commercial banks in getting ready for negative rates.

     "Some are more ready than others, and it depends on the complexity of their

systems and IT," he said.

     RBNZ Governor Adrian Orr said negative rates remained a policy option but

the decision to implement them would depend on the level of stimulus needed

later in the year.

     "The real challenge for us is to make sure that all policy options are

available," Orr said. "Why shouldn't we also retain the option if more stimulus

is needed?"

     --OUTLOOK

     The RBNZ also released its quarterly Monetary Policy Statement today, which

forecast a "baseline" scenario for the NZ economy with unemployment peaking at

9% this year and tradables inflation averaging -1% in the period to March 2021.

     The RBNZ estimates that Level 2 restrictions will reduce GDP levels by 9%,

following a 19% reduction at Level 3 and 37% at Level 4. NZ is about to move to

'Level 2' restrictions as the economy begins to re-open.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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