RBNZ Preview - November 2020: Expanding The Toolkit

MNI Point of View:

• The RBNZ set the scene for the launch of a Funding for Lending Programme (FLP) by the turn of the year. With main policy parameters widely expected to stay unchanged, the details of the new tool will take centre stage. Elsewhere, it will be more about rhetoric than policy. Given the RBNZ's explicit commitment to a "least regrets" approach, we should hear a reiteration of readiness to add stimulus if needed to sustain economic recovery.
• The picture painted by the economic data released since the last Monetary Policy Review reflects a relatively healthy performance of New Zealand's economy, relative to the difficult and highly uncertain conditions. Unemployment crept higher to 5.3% in Q3, but that uptick fell in line with market expectations and was significantly more modest than the 7.0% forecast by the RBNZ. Admittedly, consumer price inflation proved somewhat more sluggish than projected, but the RBNZ's preferred metric of core inflation remained unchanged, while the impressive pace of the rebound in house prices has taken virtually everyone by surprise. In fact, the scale of house price inflation has been so large that it has become a source of worry and the MPC may address this concern on Wednesday.
• In the absence of changes to the OCR and LSAP parameters, the highlight of this MPS will be the publication of details of the upcoming FLP. At the last Monetary Policy Review, policymakers expressed preference for launching the programme by the year-end and directed staff to make appropriate preparations. The MPS will be a perfect occasion to disclose the exact date when it is going to be rolled out. Aforementioned concern with the pace of house price inflation could see policymakers tailor the FLP to promote lending to businesses rather than the general public, which could further fuel the booming housing market.
• All in all, Wednesday's MPS should boil down to the presentation of the design and details of the FLP, any hints regarding the proximity of negative interest rates and, perhaps, commentary on the house price conundrum. New Zealand's booming housing market may (but does not have to) result in the implementation of a more business-targeted form of FLP. Other than that, MPC members have all reasons to leave policy settings unchanged. Despite occasional hiccups, the performance of New Zealand's economy has been solid, though of course in relative terms. Persistently difficult conditions, highly uncertain outlook and the RBNZ's "least regrets" approach will likely result in rhetoric underscoring the Bank's readiness to add stimulus if needed.

MNI RBNZ Preview November 2020.pdf