RBNZ Review - November 2020: Negative OCR? Too Early To Tell

MNI Point of View

• The last regular meeting of the MPC is behind us and as expected, the RBNZ left the OCR and LSAP parameters unchanged, while deciding to add monetary stimulus through a brand new Funding for Lending Programme, to be launched in December. But this was not all. The language employed by policymakers and a significant lift to the central bank's unconstrained OCR track inspired a host of sell-side desks to revise their RBNZ calls and saw local money markets price out the prospect of a negative OCR during 2021.
• The MPC was optimistic about domestic and international economic activity, noting that it "has proved more resilient than earlier assumed" and citing green shoots across a range of local indicators. The summary record of the meeting revealed that most members judged that risks were less skewed to the downside than had been thought earlier. Do note, however, that most does not mean all, even as the final decision was reached by consensus. The MPC still underscored the downside risks ahead and pointed to substantial uncertainty surrounding the health outlook, while reiterating its readiness to add monetary stimulus if necessary. That being said, the familiar refrain about downside risks underpinning the need to provide stimulus for an extended period of time was accompanied by relatively upbeat commentary.
• As things stand, the RBNZ expects the OCR to remain unchanged through March 2021, which was reaffirmed by the Governor during the press conference. What captured much attention was a significant revision to the so called unconstrained OCR track – effectively the projected amount of easing which the RBNZ would need to deliver to meet its targets, expressed in terms of the OCR assuming that it could be lowered indefinitely. The trough of the unconstrained track was lifted by 90bp, indicating that the MPC's view is that the need for further easing has diminished. Furthermore, Governor Orr refused to commit to bringing the OCR into negative territory, noting that "it's too early to tell" if negative rates will be necessary.
• As for the new tool in the shed, the Funding for Lending Programme (FLP) should be up and running in December. The RBNZ outlined some initial details on the design of the Programme and suggested that the key criterion of its success would be its ability to lower borrowing costs, rather than the scale of drawdown. Before the decision, some were wondering if the MPC would opt for a business-targeted form of the FLP, perhaps imitating the Australian Term Funding Facility, in order to avoid adding heat to the housing market while extending support to businesses. We now know that the answer is negative and the RBNZ's response to this conundrum was via aforementioned macroprudential measures. New Zealand's central bank "agreed targeting credit to specific sectors was the role of the banking sector or government initiatives" and designed a facility with few strings attached, arguing that it would boost its effectiveness.

MNI RBNZ Review November 2020.pdf