RBNZ to introduce a funding for lending programme by November

We have changed our forecasts for monetary policy settings in New Zealand and now expect that the RBNZ will introduce a Funding for Lending Programme in November. The resulting fall in interest rates will boost asset prices and suppress the New Zealand dollar, thereby boosting inflation. We continue to expect that the cash rate will be reduced to -0.50% in April 2021 and that the RBNZ will purchase $100bn of assets as part of its Large Scale Asset Purchase Programme.

As expected, the RBNZ kept the cash rate and bond purchase programme unchanged at last week's Monetary Policy Review. What was more telling, however, was the downbeat tone of the accompanying policy statement and minutes. The RBNZ remains firmly focused on the downside risks for the economy. That's despite GDP falling by less than they had expected in the June quarter, as well as the lift in a number of recent economic indicators. Some members of the Monetary Policy Committee (MPC) also cast doubt on the durability of the housing market upturn. That's particularly notable as wealth effects associated with housing are an important influence on spending by New Zealand households and are a key channel through which monetary policy operates.

In light of their ongoing concerns about the outlook, the MPC noted that "further monetary stimulus may be needed" to achieve its inflation and employment goals. But for now, the RBNZ's toolbox is looking bare. In terms of the OCR, the RBNZ has reiterated that it remains prepared to take it below zero. However, this would only occur after 16 March 2021, when its one-year commitment to keep the OCR at 0.25% expires. Similarly, while the Large Scale Asset Purchase Programme (LSAP) has been expanded to $100bn, that limit will be reached by the middle of next year, long before the need for stimulus has evaporated.

Given those constraints, the RBNZ has been developing additional monetary policy tools, including a Funding for Lending Programme (FLP) with the September policy statement noting that the MPC "preferred to launch an FLP before the end of 2020."

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