RBNZ Review - August 2020: Edging Towards Negative OCR

MNI Point of View: Edging Towards Negative OCR

• The Reserve Bank of New Zealand (RBNZ) showed its dovish face yesterday, as the Monetary Policy Committee left the Official Cash Rate unchanged at 0.25%, but boosted the size of the Large Scale Asset Purchase Program to NZD100bn, extending its duration by over a year, to June 2022. The upgrades to outdated economic projections from May MPS came as no surprise, but Governor Orr noted that risks to the outlook remain skewed to the downside. The RBNZ's rhetoric surrounding unconventional monetary policy options fitted well into the dovish tone of the announcement, as policymakers appeared to lean further towards deploying negative interest rates in the future.
• Although the expansion of the LSAP scheme at some point was widely viewed as a necessary step, analysts had either expected the RBNZ to leave the LSAP settings unchanged this time, or to up the programme's size by a smaller margin, with the more aggressive forecasts seeing the increased size at NZD80-90bn. Changes to the LSAP scheme were accompanied by a pledge to front-load operations, with Assistant Governor Hawkesby noting that a longer duration of the programme is testament to the central bank's willingness to stay in this market for longer. In MNI RBNZ Preview we pointed to why New Zealand's central bank might want to tinker with its asset-purchase programme, but the magnitude of the RBNZ's action was somewhat surprising. The MPC yet again proved that it is willing to run ahead of the curve when market conditions warrant action.
• The RBNZ used this Monetary Policy Statement to share its outlook on alternative monetary policy options. Policymakers assured that additional tools remain in active preparation and reiterated openness to negative interest rates, which could be supported by direct funding of retail banks (Funding-For-Lending). The MPC stated that such a package would be its preferred policy option, should there be a need to add further monetary stimulus beyond LSAP, suggesting that the probability of its future deployment has increased. Issues with lenders' operational preparedness for a negative OCR still have to be resolved, but these hurdles should be cleared at the end of the year at the latest.
• The MPC announced its decision just one day after New Zealand snapped its impressive run without a single new Covid-19 case. While some might think that this was a factor which helped tip the balance towards a more decisive monetary action, available evidence points to the contrary. The letter from RBNZ Governor to the Finance Minister, requesting indemnity to let the MPC increase the size and duration of LSAP was dated August 6, so the decision to boost the scheme was in the making before the confirmation of new coronavirus cases. During the press conference, policymakers clarified that the re-emergence of Covid-19 had no bearing on their decision.
• One thing that the return of coronavirus did for the RBNZ was it poured cold water on any expectations that economic forecasts got any more credible. The outlook remains invariably cloudy and infection dynamics will not only affect New Zealand's economic recovery, but may also affect its electoral cycle. While the RBNZ will have to remain flexible, yesterday's meeting leaves no doubt that they will stand ready to act.

MNI RBNZ Review August 2020.pdf