RBNZ Review - September 2020: Unpacking The Package

Unpacking The Package

• As expected, the RBNZ refrained from any major policy moves at its interim Monetary Policy Review on Wednesday, leaving the OCR and LSAP settings unchanged. The reiteration of the central bank's commitment to its existing forward guidance disappointed some doves, but it was not breaking news. Comments surrounding the exchange rate were uninspiring and roughly repeated communique from the August MPS.
• The highlight of the RBNZ's announcement was further colour around alternative monetary policy tools under consideration and their sequencing. The MPC had previously suggested that its next tool of preference would be a "package" of a negative OCR and a Funding for Lending Programme (FLP). On Wednesday, policymakers reaffirmed that these tools remain on its menu, alongside foreign assets purchases, but noted that the "alternative instruments can be deployed independently". In addition, the MPC expressed a clear preference for the deployment of an FLP before the year-end and noted that the scheme could be ready by then. Since the turn of the year marks the deadline set for lenders to prepare operationally for negative interest rates, the deployment of an FLP at the November MPS without cutting the OCR is highly likely.
• Between the lines, the announcement strongly suggested that the bank is committed to keeping its promise to leave the OCR on hold until mid-March. Much of the discussion of the sequencing of alternative policy tools implied so – from outlining the benefits of deploying an FLP before going negative to noting that an FLP would be ready by year-end, while the banking system is on track to be prepared for negative interest rates by then. For what it's worth, the MPC seemed to not only refrain from altering its forward guidance, but also subtly downplay suggestions to the contrary.
• The ramifications of the RBNZ's sequencing strategy are twofold. On one hand, an early deployment of an FLP would better prepare the banking system for a negative interest rate environment, freeing the MPC from certain second thoughts when they choose to go negative. On the other hand, an FLP would by itself provide some additional stimulus, slightly diminishing the urgency to deploy a negative OCR. The decision to set the scene for sequencing the two is rational and enhances the RBNZ's optionality with regards to the timing of negative interest rates after its forward guidance period.
• That being said, the MPC made it explicit that it still views the pair of its most preferred additional tools as a package in functional terms. The arduous task of helping New Zealand recover from the current downturn will require action further down the line and at this stage the deployment of negative interest rates, perhaps as soon as in April 2021, looks like all but a done deal.
• Wednesday's Monetary Policy Review was expected to be a fairly low-key event. Although the main policy settings remained unchanged, the MPC took the opportunity to reaffirm commitment to its forward guidance and talk us through its thinking on alternative policy tools under preparation. It didn't disclose any details on the design of its FLP, but pledged to unveil them before deploying the programme, which points to an important thing to look out for going forward.

MNI RBNZ Review September 2020.pdf