MNI REVIEW: RBNZ Ups Bond Buys; Prepares For Negative Rates

The Reserve Bank of New Zealand boosted its Large Scale Asset Program to NZD100 billion and left its official rate at a record low 0.25% Wednesday, as policymakers accepted "considerable monetary stimulus remains necessary" to achieve their employment and inflation objectives.

Looking ahead, the RBNZ Monetary Policy Committee "expressed a preference" for a package of monetary policy measures including negative official interest rates will be used if needed, and noted that central bank staff are preparing for its implementation based on the readiness of the financial system.

The central banks' Monetary Policy Statement, releases alongside the policy decision, said the RBNZ had considered other alternative policy options and concluded its next moves, if necessary, would be a for a "lower or negative" Official Cash Rate and a "Funding for Lending Program" which would facilitate low interest lending by commercial banks.

The RBNZ wrote to commercial banks earlier in the year, asking them to be ready for a negative interest rate regime by the end of the year.

FOREIGN BONDS

The RBNZ ruled out foreign asset purchases and the direct purchase of Government bonds as a next move, but said overseas purchases remained an option for future use if required.

Speaking after the policy announcement, RBNZ Governor Adrian Orr did not commit the bank to implement the negative rates program, saying it would be deployed "if deemed necessary."

"The precise degree of monetary stimulus needed is uncertain," the statement said.

Wednesday's decision was not a direct response to a short-term reintroduction of lockdown measures in parts of New Zealand this week.

Orr said that he had only been informed late Tuesday of new restrictions and the information had not changed the announcement which was decided on a baseline scenario that NZ avoided a widespread outbreak and was at Alert Level 1 or lower from early June 2020.

BOND BUYS

Addressing the size o the RBNZ's bond purchase scheme, Assistant Governor Christian Hawkesby said the bank had assessed that increasing its purchases of government debt would mean the RBNZ held up to 60% of all debt on issue, a "very deliberate step" to maintain a secondary market.

The RBNZ said the primary goal of increasing the LSAP was to lower domestic lending rates, but also noted that the NZD had appreciated by 6% against the Trade Weighted Index since the last statement in May.

This was attributable to risk sentiment -- as New Zealand had contained the pandemic -- and rebounding prices for key export commodities.