RBNZ: Clearly dovish, NZD to come under pressure – ANZ

The Reserve Bank of New Zealand (RBNZ) increased their quantitative easing (LSAP) programme to NZD 100 billion and extended its length from 12 to 22 months. As regards potential alternative policy options beyond the LSAP, the RBNZ expressed a preference for a lower or negative OCR and a ‘Funding for Lending Programme’, while leaving all options on the table. The OCR will remain unchanged at 0.25% until March 2021 but the odds of lower rates beyond that have risen. Yields and the NZD both fell in response, per ANZ Bank.

Key quotes

“The RBNZ’s LSAP programme was scaled up from NZD 60 billion to NZD 100 billion, even more than we were expecting. This was based on ‘updated staff advice that central bank purchases could absorb a larger proportion of the total market than previously thought without affecting market functioning.’ In addition, ‘Members noted and endorsed staff advice that a larger LSAP programme would mean purchases could be front-loaded in order to put more downward pressure on New Zealand wholesale interest rates’.” 

“The RBNZ reiterated that the OCR would remain unchanged at 0.25% until at least March 2021, but gave no forecasts after that.”

“It’s difficult to imagine a more dovish outcome than what we have seen. This speaks to the whole term structure of interest rates going lower, with the prospect of negative rates driving the short end lower, and the larger than expected LSAP driving the long end lower. Against the global backdrop of inflation fears, we expect NZGBs to outperform global peers, and for the NZD to be under significant pressure over coming weeks.” 

“The NZD moved 30-40bps lower immediately, but has since recovered part of the move. Given how dovish the tone was, we see a real risk that the NZD weakens further in coming weeks as the gravity of today sinks in.”