RBNZ: There will be delays to the start date for increases in bank capital

The Reserve Bank of New Zealand has said that there will be delays to the start date for increases in bank capital.

The increase in the prudential capital buffer will not begin until July 2022 to allow banks continued headroom to respond to effects of the covid-19 pandemic.

The central bank remains committed to increasing capital requirements in the medium-term to underpin financial stability

Other aspects of capital reforms will proceed from 1 July 2021, including new rules around capital instruments.

In December, the reserve bank will consult about re-instating loan-to-value ratio restrictions on high-risk lending from 1 March 2021.

The RBNZ has written to insurers to advise it has updated expectations on dividends.

The RBNZ expects insurers will only make dividend payments if it is prudent to do so, having regard to their own stress testing and elevated risks.

Market implications

We have the RBNZ meeting today. 

The RBNZ is preparing to switch monetary tools.

''We expect an FLP and a negative OCR next year. But at the same time, we expect the RBNZ will slow purchases under the LSAP,'' analysts at Westpac explained. 

This represents a dovish bias, but it could be less dovish than the markets expect, according to the analysts in the following key points:

The key message will be that the RBNZ intends to keep interest rates low for a prolonged period, rather than pushing rates lower.

We expect a Funding for Lending Programme (FLP) will be announced. It will be small and targeted at business lending.

We now expect 25bps OCR cuts in April, May and August next year (previously one 75bps cut in April).

As the FLP and negative OCR take effect, the pace of LSAP bond purchases will be gradually reduced in a switch of monetary tools.

We expect no official change to the LSAP. Next year we expect the LSAP to be stretched to $100bn over three years (currently $100bn over two).

Next year, we expect that the RBNZ will reintroduce LVR restrictions targeted at property investors.

That offers a steady result for the kiwi today, propped up, instead, by improving risk sentiment due to the vaccine hopes and a progressive weakening in the greenback's allure due to the US President Joe Biden victory. 

If the DXY is held below the current confluence area, then the Kiwi can continue higher in a relief rally that is supportive of global growth currencies and the commodity complex in general.