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The Reserve Bank of New Zealand has an increasingly positive assessment of the domestic economy, but stands prepared to use easier monetary policy tools, including negative interest rates, if required, with the banking system now "operationally ready" for such a move.
"We have always talked about negative rates as an option that should be available to us, not an immediate expectation to have to use," RBNZ Governor Adrian Orr said at a press conference following the release of the bank's quarterly monetary policy statement, which showed that the economic rebound has been stronger than expected.
The RBNZ's growth and inflation forecasts were based on ongoing monetary stimulus, but there was a "long list of things to worry about" such as a return of the pandemic and longer-than-expected border restrictions which could sour the recovery, Orr added.
RECORD LOW CASH RATE
The central bank left the official cash rate unchanged at the record low of 0.25% on Wednesday and confirmed the ongoing Quantitative Easing programme, which will run until mid-2022. Orr said the NZD100-billion figure for the QE program was a "limit and not a target."
The RBNZ now forecasts that GDP will remain at "pre-COVID" levels in 2021 before accelerating to 3.8% by the end of 2022.
On inflation, which is currently at 1.4% as against the target range of 1-3%, the forecast is for an increase to over 2% by mid-2023. The bank's baseline scenario is for the NZD to stay at its current rate of around 75 against the Trade Weighted Index.