OCR & LSAP Size Unchanged, FLP To Launch In December

The RBNZ's latest monetary policy decision saw the Bank:

• hold the OCR at 0.25 percent, in accordance with the guidance issued on 16 March;
• maintain the existing LSAP programme of a maximum of $100b by June 2022; and
• direct the Bank to implement an FLP in early December 2020.

• Members discussed domestic economic developments since the August Statement. Overall, economic outcomes had been more resilient than earlier assumed. This trend was evident across a range of information, including the labour market, household spending, GDP, asset prices, and goods trade. These outcomes partly reflected the effectiveness of policy responses to the shock. However, members noted that the severe economic effects of the pandemic were persisting and have significant implications for the Committee in meeting its remit. Both headline and underlying inflation were below 2 percent, inflation expectations were subdued, and employment was assessed to be below its maximum sustainable level.
• The outlook for global economic activity remains dependent on the containment of the virus. While recent news on vaccine developments is positive, there remains a long and uncertain lag before any widespread vaccine deployment may be achieved.
• We expect an ongoing increase in unemployment as the economy adjusts. Consumer price inflation is also projected to remain at the lower-end of the remit target range for a period, and inflation expectations remain subdued.
• Members agreed, however, that it was still the case that unpredictable events could push inflation and employment significantly lower than in the baseline scenario. They discussed events such as ongoing virus outbreaks, delays in borders reopening, and continued reluctance to invest by businesses due to general uncertainty.
• The Committee reaffirmed that a lower or negative OCR, purchases of foreign assets, and interest rate swaps remain under consideration.
• The Committee agreed that monetary policy will need to remain stimulatory for a long time to meet the consumer price inflation and employment remit, and that it must remain prepared to provide additional support if necessary
• Members discussed the design of the FLP. They endorsed staff advice that the programme should be of sufficient size to allow financial institutions to reduce interest rates with confidence that a low cost, stable funding source was available.
• Members noted that the banking system is on track to be operationally ready for negative interest rates by year end. The Committee agreed that it was prepared to lower the OCR to provide additional stimulus if required.