Give us the FLP first, please.
- The RBNZ left the OCR unchanged at 25bps. And the LSAP programme was left at $100b, as expected.
- In a positive development, the RB spoke of unpacking previously packaged tools – as we suggested in Monday’s report “Unpacking and then repacking a packaged deal.”
- Members also agreed that the alternative instruments can be deployed independently, and noted that the FLP would be ready before the end of this calendar year. We couldn’t agree more. Way to go!
“In line with the weak underlying international and domestic economic conditions, the Committee expects a rise in unemployment and an increase in firm closures, as resource reallocation continues. Members agreed that monetary policy will need to provide significant economic support for a long time to come to meet the inflation and employment remit, and promote financial stability. They also agreed they are prepared to provide additional stimulus.” RBNZ MPR, Sept’20.
The RBNZ has made it increasingly clear that more policy stimulus will be needed to meet its dual mandate. While the economy has already bounced out of the June quarter hole, we have yet to experience the full force of the pandemic on the economy. The global situation has deteriorated, and NZ’s unemployment rate is likely to rise. Future policy stimulus includes both a negative cash rate (NIRP) and a bank funding for lending programme (FLP). Doing more, much more, is the so-called path of least regret.
We’ve taken some comfort in the RB potentially pulling the levers on these polices separately. We have continually noted that it would be better to focus on the FLP now, and consider NIRP later. The bank FLP is the next best tool in the shed, and we will get the FLP before year-end. We expect the FLP to be started in November.
“The Committee agreed that providing term funding at rates near the OCR via an FLP would lower the financial system’s funding costs, and therefore borrowing costs for firms and households, and support the availability of credit to the economy. The effectiveness of the programme would be influenced by the degree to which financial institutions passed on their funding cost declines to their customers. Members agreed that they preferred to launch an FLP before the end of 2020.”
The FLP will have an immediate, and lasting impact on retail rates. The market took the separation of the FLP from the NIRP as reducing the probability of negative rates. In theory, yes. An effective FLP reduces the need of NIRP. But, we still think NIRP will be deployed. The RBNZ seem dead set on a negative interest rate path. And the timing of a negative OCR will most likely be early next year. But how early? The RBNZ is committed to keeping the cash rate unchanged for 12 months back in March. If the Bank follows its forward guidance to the letter, then the earliest timing would be its pre-scheduled meeting in mid-April. But the best bang for buck would be to cut in February 2021, just a few weeks before the Bank’s self-imposed guide. February is a full MPS, enabling the RBNZ to ram home the bold move with a dovish statement, full of forecasts and special boxes, and press conference. Of all the criticism the RBNZ will get for going negative in February, we don’t think it would be the “breaking” of their 12-month guidance made in mid-March by a few weeks.
Throwing more fuel on the fire
Further policy action will lower retail interest rates, adding fuel to a fiery housing market. We had been surprised by the fervour of the housing market straight out of lockdown. Moreover, Auckland’s level 3 lockdown caused little disruption in August. Sales activity across NZ are at levels last seen five years ago, and house price growth has accelerated. Record low mortgage rates and the removal of LVR restrictions explain much of the renewed activity. But the ongoing shortage of housing is playing a role too. As evident in the record low levels of listed property.
We still expect the housing market to cool heading into next year. The support delivered by the wage subsidy is fading, and the unemployment rate is rising. Net migration – a major source of demand – has also slowed to a trickle. We are still forecasting a moderate fall in house prices at the beginning of next year. But there is certainly significant upside to this view.
Markets reaction
The Kiwi was on a downtrend heading into the announcement, trading at 66.08c. While the statement read dovish, market traders were expecting the MPC to reiterate its preference for the NIRP + FLP package deal. Indeed, mere mentions of a NIRP have been successful in the past to jawbone the Kiwi lower. But as the headlines fed through, a different story was unfolding. The possibility to de-couple the package implied in today’s statement saw the Kiwi shoot up ~30pts to a high of 66.47c. Against our Antipodean counterpart, the NZ also popped ~40pts. But excitement wears off, the Kiwi is back to 66.15USc and 92.82AUSc.
RBNZ Statement
Tēnā koutou katoa, welcome all.
The Monetary Policy Committee agreed to continue with the Large Scale Asset Purchase (LSAP) Programme up to $100 billion. This action is necessary to further lower household and business borrowing rates in order to achieve the Committee’s inflation and employment remit. The Official Cash Rate (OCR) is being held at 0.25 percent in accordance with the guidance issued on 16 March.
Reflecting the possible need for further monetary stimulus, the Committee noted the progress being made on the Bank’s ability to deploy additional monetary instruments. The instruments include a Funding for Lending Programme (FLP), a negative OCR, and purchases of foreign assets. The Committee agreed that these instruments can be mutually supportive in bolstering economic activity. Members also agreed that the alternative instruments can be deployed independently, and noted that the FLP would be ready before the end of this calendar year.
Economic information available since the August Monetary Policy Statement, both international and domestic, has confirmed the level of economic activity remains significantly below that experienced prior to the COVID-19 economic disruption. The ongoing virus-led activity restrictions – most notably in Auckland – had also continued to dampen economic activity, and business and consumer confidence.
Any significant change in the global and domestic economic outlook remain dependent on the containment of the virus, which is highly uncertain. International border restrictions will continue to significantly curtail migration and tourism, and lead to the activity outlook being uneven across industries and regions. Commodity prices for New Zealand’s exports remain robust, but this has been partly offset by the New Zealand dollar exchange rate moderating the return to local export producers.
Ongoing support for domestic economic activity is being provided through significant government spending on business assistance and household income support. This will be accompanied by a rising level of government investment. However, the removal of temporary support policies has commenced. For example, the Wage Subsidy scheme is now closed to new entrants.
In line with the weak underlying international and domestic economic conditions, the Committee expects a rise in unemployment and an increase in firm closures, as resource reallocation continues. Members agreed that monetary policy will need to provide significant economic support for a long time to come to meet the inflation and employment remit, and promote financial stability. They also agreed they are prepared to provide additional stimulus.