RBNZ Preview: Prepping up for negative interest rates

New Zealand has steered through the coronavirus pandemic successfully, although the same cannot be said about its Western trading partners, which casts a dour outlook on its economic recovery. Therefore, the Reserve Bank of New Zealand (RBNZ) could be compelled to do more to bolster the economic rebound when it announces its monetary policy decision on Wednesday.

RBNZ readies for cheap funding  

The RBNZ is likely to keep the Official Cash Rate (OCR) unchanged at a record low of 0.25% for the fifth straight month in November. However, the central bank is set to introduce a new stimulus tool in a Funding for Lending Programme (FLP). The new policy tool will provide cheap funding to the banks, allowing them to further reduce their lending rates.

The FLP is seen as a crucial step towards negative interest rates, as the Kiwi central bank prepares for sub-zero rates next year, in a bid to spur economic growth. The programme could be established before the end of the year.  

In its September policy meeting, the RBNZ board members kept the OCR steady at 0.25% while maintaining the Large-Scale Asset Purchase (LSAP) program at NZ$100 billion. The central bank expanded the LSAP from NZ$40 billion to NZ$100 billion in August.

The policy announcement is scheduled this Wednesday at 0100 GMT followed by Governor Adrian Orr’s Orr will hold a press conference at 0200 GMT.

Economic recovery concerns justify new policy tool?

As the South-Pacific island nation rebounds from a shallower-than-expected recession in the first half of 2020, the downside risks to the economic outlook continue to persist in the longer run. Despite the domestic fundamentals are showing an improvement in trend, fresh lockdowns in the Western world are likely to impact the country’s tourism industry.

Further, coronavirus caution induced softer-than-expected rise in the price pressures in the September quarter could likely prompt the RBNZ to ease funding, in order to boost consumption and inflation.

Meanwhile, the New Zealand Institute of Economic Research’s (NZIER) Shadow Board continues to question the need for negative rates and additional quantitative easing (QE) program expansion. Therefore, it's important for the RBNZ to launch the FLP to spur growth and make a negative OCR effective when it plans to deploy sub-zero rates early next year.

Heading into the RBNZ showdown, the NZD/USD pair stands resilient despite the OIS curve showing increased odds of additional easing in the coming months. Biden’s presidency in the US election combined with the COVID-19 vaccine optimism powered the kiwi to 20-month highs of 0.6855 on Monday.

The market mood remains upbeat as the progress in vaccine trials globally paves that way for a solid economic recovery, benefiting the higher-yielding assets, including the Antipodean. Therefore, a strong dovish language in the policy statement is needed to alter NZD/USD’s bullish course. Although, the risk sentiment at the time of the announcement could also impact the kiwi’s reaction.

More: NZD/USD to continue surfing the tide of global news above 0.68