MNI INTERVIEW: No RBNZ Foreign Bond Buys Unless FX Out of Line

The Reserve Bank of New Zealand will only consider intervention to weaken the New Zealand dollar through foreign asset purchases if the currency "got out of line with fundamentals," chief economist Yuong Ha told MNI in an interview on Thursday

While the exchange rate was an important transmission channel for NZ as a small open economy, it was "hard to swim against the global tide," Yuong said, admitting it was difficult to have a "meaningful influence" on the level.

"At the margin we might be able to have some influence but its not something we can directly control like we can the interest rate channel," he said.

He confirmed the RBNZ was retaining the policy option of foreign asset purchases to exert downwards pressure on the NZD, but said the bank was not at this point yet.

"The relative economic situation in NZ looks a bit better than in other countries, so there are good reasons why the currency is where it is," said Yuong commenting on the dollar's strength, which stood at NZD0.6580 vs the U.S. dollar, down on the day, but up more than 20% from a low of NZD0.5470 in mid-March.

RATE CUT, FUNDING

Although ruling out foreign asset buys, for now at least, Yuong confirmed the RBNZ was preparing for further easing later in the year if needed, with the next move likely to be a combination of zero or negative official interest rates and a low cost funding program to commercial banks introduced at the same time, with the chief goal of reducing retail lending rates.

The central bank's current priority was delivering lower retail interest rates and encouraging lending to businesses and households, he said.

Yuong was speaking after the RBNZ'S Aug 12 announcement of an increase in its Large Scale Asset Purchase program from NZD60 billion to NZD100 billion, while leaving official rates unchanged at a record low 0.25%.

"We are looking at a world where significant monetary stimulus is required and we are doing that in a LSAP program and we are going to front load our purchases through lower rates," Yuong told MNI.

"We just have to sit and wait and see how the economy develops."

The tandem moves of another official rate cut and a funding facility are the bank's next ammunition, held in reserve as it watches both the impact of current policies and also the new Covid-19 outbreaks in NZ, which has forced the re-introduced of Level 3 restrictions in Auckland for three days.

LOWER RETAIL RATES

Yuong said the RBNZ had continued to be in contact with commercial banks to prepare them for zero or negative interest rates by the end of the year, although the timing of any move was dependent on how the economy performed in the next quarter.

He said that while wholesale rates may be at zero or negative there was no expectation that retail rates would go as low "but there is room for them to fall from here," he said.

The RBNZ has postponed plans for higher capital buffers for banks, and Yuong said that in return banks should "be thinking about what is their best contribution to support the recovery."

"We don't want a credit crunch on top of an economic contraction," he added.