RBNZ: Rates on hold, QE expanded – UOB

Economist at UB Group Lee Sue Ann reviewed the recent decision by the RBNZ to leave rates unchanged and expand its QE programme.

Key Quotes

“The Reserve Bank of New Zealand (RBNZ) held its Official Cash Rate (OCR) steady at a record-low of 0.25%. However, the Large Scale Asset Purchase (LSAP) programme has been expanded to a potential NZD60bn, from its previous limit of NZD33bn. The LSAP programme includes NZ Government Bonds, Local Government Funding Agency Bonds and, now, NZ Government Inflation-Indexed Bonds.”

“In its accompanying press release, the RBNZ stated that “the Monetary Policy Committee is prepared to use additional monetary policy tools if and when needed, including reducing the OCR further, adding other types of assets to the LSAP programme, and providing fixed term loans to banks.”

“According to minutes of the meeting, policymakers discussed the option of a negative OCR in future, although at present financial institutions are not yet operationally ready. Consequently, the Committee reaffirmed its forward guidance that the OCR will remain at 0.25% until early 2021.”

“That said, even with the need for further monetary policy easing, we think that negative interest rates will come with considerable baggage and we do not expect the RBNZ to take the OCR into negative territory, at least not any time soon. Instead, we think the RBNZ will continue to use volume announcements (eg. the programme is currently NZD60bn in size) as it fine-tunes its policy stance. However, another option would be to adjust their QE programme to a type of “yield curve control” (or YCC), as used in Australia.”